To think critically about: Key differences between common stock, preferred stock , and corporate bonds Introduction: Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

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Answer 1

Question

Chapter 2, Problem 1PS

Summary Introduction

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Expert Solution & Answer

Explanation of Solution

Common Stock − It is the stock which has voting privileges/rights associated with it. Holders of common stock are owners of the company as ownership is divided in proportion to the common stock held by them. Holders of common stock are usually termed as shareholders of the company. Being owners, they have the right to vote at the time of decision making and at annual general meeting of the company. Dividend amount varies depending upon the profits of the company. If a company has no profit or decides not to pay profit in any year, than in that case no dividend is distributed to the shareholders and no accumulation of dividend occur.

Preferred Stock - It is a share similar to an equity share with the feature that it gets priority at the time of dividend payment i.e. the dividend is paid first to preferred shareholder as compared to ordinary shareholder. Thus, it is debt in nature. Dividend is paid at a fixed rate to the holders of preferred stock. The dividend amount gets accumulated in case a company decides not to distribute dividend in any particular year. Thus, the dividend gets accumulated and paid subsequently in the future year.

Corporate Bond - It is a financial instrument which is used to raise money from the debt market i.e. it is like a loan against the security. Interest is paid by the company to the holders at a fixed rate which can be quarterly/semi-annually/annually. There is no option available with the company to avoid payment of interest or to defer it to future years in case of bondholders.

Conclusion

Thus, all the three type of securities have different characteristics although all are used for financing purpose by the company.

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Students have asked these similar questions

Eccles Inc., a zero-growth firm, has an expected EBIT of $100.000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. If the effective personal tax rates on debt income and stock income are Td = 25% and TS = 20% respectively, what is the value of the firm according to the Miller model (Based on the same unlevered firm value in the earlier question)? a. $475,875 b. $536,921 c. $587,750 d. $623,050 e. $564,167

Refer to the data for Eccles Inc. earlier. If the effective personal tax rates on debt income and stock income are Td = 25% and TS = 20% respectively, what is the value of the firm according to the Miller model (Based on the same unlevered firm value in the earlier question)? a. $475,875 b. $536,921 c. $587,750 d. $623,050 O $564,167

Warren Supply Inc. wants to use debt and common equity for its capital budget of $800,000 in the coming year, but it will not issue any new common stock. It is forecasting an EPS of $3.00 on its 500,000 outstanding shares of stock and is committed to maintaining a $2.00 dividend per share. Given these constraints, what percentage of the capital budget must be financed with debt? a. 33.84% b. 37.50% c. 32.15% d. 30.54% e. 35.63%

Answer 2

Question

Chapter 2, Problem 1PS

Summary Introduction

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Expert Solution & Answer

Explanation of Solution

Common Stock − It is the stock which has voting privileges/rights associated with it. Holders of common stock are owners of the company as ownership is divided in proportion to the common stock held by them. Holders of common stock are usually termed as shareholders of the company. Being owners, they have the right to vote at the time of decision making and at annual general meeting of the company. Dividend amount varies depending upon the profits of the company. If a company has no profit or decides not to pay profit in any year, than in that case no dividend is distributed to the shareholders and no accumulation of dividend occur.

Preferred Stock - It is a share similar to an equity share with the feature that it gets priority at the time of dividend payment i.e. the dividend is paid first to preferred shareholder as compared to ordinary shareholder. Thus, it is debt in nature. Dividend is paid at a fixed rate to the holders of preferred stock. The dividend amount gets accumulated in case a company decides not to distribute dividend in any particular year. Thus, the dividend gets accumulated and paid subsequently in the future year.

Corporate Bond - It is a financial instrument which is used to raise money from the debt market i.e. it is like a loan against the security. Interest is paid by the company to the holders at a fixed rate which can be quarterly/semi-annually/annually. There is no option available with the company to avoid payment of interest or to defer it to future years in case of bondholders.

Conclusion

Thus, all the three type of securities have different characteristics although all are used for financing purpose by the company.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 2, Problem 1PS

Summary Introduction

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Expert Solution & Answer

Explanation of Solution

Common Stock − It is the stock which has voting privileges/rights associated with it. Holders of common stock are owners of the company as ownership is divided in proportion to the common stock held by them. Holders of common stock are usually termed as shareholders of the company. Being owners, they have the right to vote at the time of decision making and at annual general meeting of the company. Dividend amount varies depending upon the profits of the company. If a company has no profit or decides not to pay profit in any year, than in that case no dividend is distributed to the shareholders and no accumulation of dividend occur.

Preferred Stock - It is a share similar to an equity share with the feature that it gets priority at the time of dividend payment i.e. the dividend is paid first to preferred shareholder as compared to ordinary shareholder. Thus, it is debt in nature. Dividend is paid at a fixed rate to the holders of preferred stock. The dividend amount gets accumulated in case a company decides not to distribute dividend in any particular year. Thus, the dividend gets accumulated and paid subsequently in the future year.

Corporate Bond - It is a financial instrument which is used to raise money from the debt market i.e. it is like a loan against the security. Interest is paid by the company to the holders at a fixed rate which can be quarterly/semi-annually/annually. There is no option available with the company to avoid payment of interest or to defer it to future years in case of bondholders.

Conclusion

Thus, all the three type of securities have different characteristics although all are used for financing purpose by the company.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 2, Problem 1PS

Summary Introduction

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Expert Solution & Answer

Explanation of Solution

Common Stock − It is the stock which has voting privileges/rights associated with it. Holders of common stock are owners of the company as ownership is divided in proportion to the common stock held by them. Holders of common stock are usually termed as shareholders of the company. Being owners, they have the right to vote at the time of decision making and at annual general meeting of the company. Dividend amount varies depending upon the profits of the company. If a company has no profit or decides not to pay profit in any year, than in that case no dividend is distributed to the shareholders and no accumulation of dividend occur.

Preferred Stock - It is a share similar to an equity share with the feature that it gets priority at the time of dividend payment i.e. the dividend is paid first to preferred shareholder as compared to ordinary shareholder. Thus, it is debt in nature. Dividend is paid at a fixed rate to the holders of preferred stock. The dividend amount gets accumulated in case a company decides not to distribute dividend in any particular year. Thus, the dividend gets accumulated and paid subsequently in the future year.

Corporate Bond - It is a financial instrument which is used to raise money from the debt market i.e. it is like a loan against the security. Interest is paid by the company to the holders at a fixed rate which can be quarterly/semi-annually/annually. There is no option available with the company to avoid payment of interest or to defer it to future years in case of bondholders.

Conclusion

Thus, all the three type of securities have different characteristics although all are used for financing purpose by the company.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 2, Problem 1PS

Summary Introduction

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Expert Solution & Answer

Explanation of Solution

Common Stock − It is the stock which has voting privileges/rights associated with it. Holders of common stock are owners of the company as ownership is divided in proportion to the common stock held by them. Holders of common stock are usually termed as shareholders of the company. Being owners, they have the right to vote at the time of decision making and at annual general meeting of the company. Dividend amount varies depending upon the profits of the company. If a company has no profit or decides not to pay profit in any year, than in that case no dividend is distributed to the shareholders and no accumulation of dividend occur.

Preferred Stock - It is a share similar to an equity share with the feature that it gets priority at the time of dividend payment i.e. the dividend is paid first to preferred shareholder as compared to ordinary shareholder. Thus, it is debt in nature. Dividend is paid at a fixed rate to the holders of preferred stock. The dividend amount gets accumulated in case a company decides not to distribute dividend in any particular year. Thus, the dividend gets accumulated and paid subsequently in the future year.

Corporate Bond - It is a financial instrument which is used to raise money from the debt market i.e. it is like a loan against the security. Interest is paid by the company to the holders at a fixed rate which can be quarterly/semi-annually/annually. There is no option available with the company to avoid payment of interest or to defer it to future years in case of bondholders.

Conclusion

Thus, all the three type of securities have different characteristics although all are used for financing purpose by the company.

Answer 6

Chapter 2, Problem 1PS

Summary Introduction

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Expert Solution & Answer

Explanation of Solution

Common Stock − It is the stock which has voting privileges/rights associated with it. Holders of common stock are owners of the company as ownership is divided in proportion to the common stock held by them. Holders of common stock are usually termed as shareholders of the company. Being owners, they have the right to vote at the time of decision making and at annual general meeting of the company. Dividend amount varies depending upon the profits of the company. If a company has no profit or decides not to pay profit in any year, than in that case no dividend is distributed to the shareholders and no accumulation of dividend occur.

Preferred Stock - It is a share similar to an equity share with the feature that it gets priority at the time of dividend payment i.e. the dividend is paid first to preferred shareholder as compared to ordinary shareholder. Thus, it is debt in nature. Dividend is paid at a fixed rate to the holders of preferred stock. The dividend amount gets accumulated in case a company decides not to distribute dividend in any particular year. Thus, the dividend gets accumulated and paid subsequently in the future year.

Corporate Bond - It is a financial instrument which is used to raise money from the debt market i.e. it is like a loan against the security. Interest is paid by the company to the holders at a fixed rate which can be quarterly/semi-annually/annually. There is no option available with the company to avoid payment of interest or to defer it to future years in case of bondholders.

Conclusion

Thus, all the three type of securities have different characteristics although all are used for financing purpose by the company.

Answer 7

Chapter 2, Problem 1PS

Summary Introduction

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Answer 8

Expert Solution & Answer

Explanation of Solution

Common Stock − It is the stock which has voting privileges/rights associated with it. Holders of common stock are owners of the company as ownership is divided in proportion to the common stock held by them. Holders of common stock are usually termed as shareholders of the company. Being owners, they have the right to vote at the time of decision making and at annual general meeting of the company. Dividend amount varies depending upon the profits of the company. If a company has no profit or decides not to pay profit in any year, than in that case no dividend is distributed to the shareholders and no accumulation of dividend occur.

Preferred Stock - It is a share similar to an equity share with the feature that it gets priority at the time of dividend payment i.e. the dividend is paid first to preferred shareholder as compared to ordinary shareholder. Thus, it is debt in nature. Dividend is paid at a fixed rate to the holders of preferred stock. The dividend amount gets accumulated in case a company decides not to distribute dividend in any particular year. Thus, the dividend gets accumulated and paid subsequently in the future year.

Corporate Bond - It is a financial instrument which is used to raise money from the debt market i.e. it is like a loan against the security. Interest is paid by the company to the holders at a fixed rate which can be quarterly/semi-annually/annually. There is no option available with the company to avoid payment of interest or to defer it to future years in case of bondholders.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Conclusion

Thus, all the three type of securities have different characteristics although all are used for financing purpose by the company.

Answer 12

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To think critically about: Key differences between common stock, preferred stock , and corporate bonds Introduction: Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Videos

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Explanation of Solution

Want to see more full solutions like this?

Chapter 2 Solutions

To think critically about: Key differences between common stock, preferred stock , and corporate bonds Introduction: Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Videos

To think critically about: Key differences between common stock, preferred stock, and corporate bonds Introduction: Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.

Explanation of Solution

Want to see more full solutions like this?

Chapter 2 Solutions

To think critically about:

Key differences between common stock, preferred stock, and corporate bonds

Introduction:

Securities: There are various modes to raise capital by a firm. Some of the modes are by the issue of common stock, bonds, debentures, preferred stock, etc.