MGAB01H3 Lecture : Preferred Shares

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ochretortoise616

10 Nov 2010

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Preferred shares have contractual provisions that give them a preference, or priority, over common shares in certain areas. Typically preferred shares have priority over dividends, and assets in the event of liquidation. Like common shares, preferred shares may be issued for cash or for noncash assets. Dividend preference: corporate income is distributed to preferred shareholders before it goes to common shareholders. The first claim to dividends does not, however, guarantee the payment of dividends. Cumulative dividend: means that preferred shareholders must be paid both current year dividends and any unpaid prior year dividends before common shareholders receive dividends. When preferred shares are cumulative, preferred dividends that are not declared in a given period are called dividends in arrears. Dividends in arrears are not considered a liability. No payment obligation exists until a dividend is declared by the board of directors. Convertible preferred: shares give shareholders the option of exchanging preferred shares for common shares at a specified ratio.

Related Questions

1) Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are

Select one:

a. convertible

b. cumulative

c. noncumulative

d. participating

2) Which of the following is usually a right of a preferred stockholder?

Select one:

a. Right to sue company in bankruptcy proceedings if promised preferred dividends are not paid.

b. Right to receive dividend payments before any dividends are paid to common stockholders.

c. Right to convert shares of common stock on demand.

d. Preemptive right to participate in the issuance of new common shares.

3) Another term sometimes applied to common stockholder is a

Select one:

a. residual owner of the firm.

b. reciprocal owner of the firm.

c. net owner of the firm.

d. fundamental or basic owner of the firm.

4) Because equity holders are the last to receive any distributions of assets as a result of bankruptcy proceedings, common stockholders expect

Select one:

a. warrants to be attached to the stocks as a sweetener.

b. greater compensation in the form of dividends and/or rising stock prices.

c. fixed dividends payments.

d. all profits to be paid out in dividends.

5) Preferred stock is valued as if it were a

Select one:

a. fixed-income obligation.

b. bond.

c. common stock.

d. perpetuity.

6) Economically rational buyers and sellers use their assessment of an asset

ultramarineelk44

Can you explain step by steps those answers! Thank you

Wally Corporation acquired 70 percent of the common shares and 60 percent of the preferred shares of Safety Corporation at underlying book value on January 1, 20X6. At that date, the fair value of the noncontrolling interest in Safetyâs common stock was equal to 30 percent of the book value of its common stock. Safetyâs balance sheet at the time of acquisition contained the following balances:

Assets $700,000 Liabilities $110,000

Preferred Stock 100,000

Common Stock 200,000

Retained Earnings 290,000

Total Assets $700,000 Total Liabilities and Equities $700,000

The preferred shares are cumulative and have an 8 percent annual dividend rate and are three years in arrears on January 1, 20X6. All of the $10 par value preferred shares are callable at $12 per share. During 20X6, Safety reported net income of $80,000 and paid no dividends.

11. Based on the preceding information, what will be the amount of income to be assigned to the noncontrolling interest in the 20X6 consolidated income statement?

Answer is D. $24,800

12. Based on the preceding information, the amount assigned to the noncontrolling stockholdersâ share of preferred stock interest in the preparation of a consolidated balance sheet on January 1, 20X6 is

Answer is A. $57,600

13. Based on the preceding information, what is the portion of Safetyâs retained earnings assignable to its preferred shareholders on January 1, 20X6?

Answer is B. $44,000

14. Based on the information provided, what is the book value of the common stock on January 1, 20X6?

Answer is C. $446,000

15. Based on the information provided, what amount will be reported as the noncontrolling interest in the consolidated balance sheet on January 1, 20X6?

Answer is B. $191,400

graywater-buffalo134

9. Which of the following statements is NOT CORRECT?

a	a. Owners of preferred stock have greater voting rights than common shareholders.
	b. From an individual investor's perspective, preferred stock is riskier than bonds.
	c. Companies are more likely to issue preferred stock if they have a low tax bracket since preferred stock dividends are not tax deductible.
	d. If a preferred issue is cumulative this means that any unpaid dividends are held in arrears.

10. As a general rule, the optimal capital structure

Maximizes expected EPS also maximizes the price per share of common stock.
Minimizes the interest rate on debt also maximizes the expected EPS.
Minimizes the required rate on equity also maximizes the stock price.
Maximizes the price per share of common stock and minimizes the WACC.

11. Which of the following statements about warrants and convertibles is NOT CORRECT?

a. The value of both warrants and convertibles depends on the stock price.

b. One primary difference between warrants and convertibles is that warrants bring in additional funds to the firm when exercised while convertibles reduce debt when exercised.

c. The coupon rate on convertible debt is higher than the coupon rate on similar straight debt because convertibles are riskier.

d. Warrants and Convertibles are used by corporations in order to get a lower rate on their debt.

12. In the lease versus buy decision, leasing is often preferable

a. if the firm is unable to borrow funds at a low rate.

b. if the firm needs a specific piece of equipment that only has value to that firm.

c. Because lease obligations do not affect the riskiness of the firm.

d. if the lessee has a higher tax rate than the lessor

13. Which statement is False?

The WACC is the required return on the firm

cerisejackal589

MGAB01H3 Lecture : Preferred Shares

MGAB01H3 Full Course Notes

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