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Chapter 5: Q11DQ. (page 565)

A small amount of preferred stock is participating. What would your reaction be if someone said common stock is also participating?

Short Answer

Expert verified

The common share is a participation type of security as the common stockholders have the right to the earnings of a company.

Step by step solution

01

Meaning of stock issuance

Stock issuance is the process of issuing shares by a company. The company can issue different types of stocks depending on its requirement and other factors such as dilution of ownership, dividend obligation, etc.

02

Explanation for the requirement

The participation of preferred stock refers to the fact that the preferred stockholders may get a pay-out that is more than the quoted rate. This scenario usually occurs when the company has generated good profits in a year. The common stock is also a participation type of security as they do not have a quoted price but the amount of dividend distributed to them is dependent on the earnings of the company.

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Most popular questions from this chapter

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

a. How many shares of stock must be sold to net $21,120,000? (Note: No out-of-pocket costs must be considered in this problem.)

Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?

Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay鈥檚 Hamburger Heaven. Becker Brothers is 鈥渉andling鈥� 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.

Compute Becker Brother鈥檚 overall gain or loss from managing the issue.

What are the disadvantages to being public?

Do corporations rely more on external or internal funds as sources of financing?
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