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Chapter 21: Q. 15 (page 484)

Outline the differences between common stock and preferred stock.

Short Answer

Expert verified

The stock owner have right to vote for major policy decisions.

The preferred stock owners must receive a specific amount of dividends.

Step by step solution

01

Introduction

The main distinction between common and preferred stock is that although preferred stock does not permit voting, common stock does. Because preferred shareholders require priority over a company's income, they receive dividends before common shareholders.

02

Explanation

The common stockholder seems to have the right to vote on important company policy decisions, which including board of director selections. Ordinary stockholders do not have voting rights, but they do own a piece of the company's income.

Special investors must receive a certain amount of dividend every period until common stockholders get anything.

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Most popular questions from this chapter

What likely caused average stock prices to decline even after China's government's efforts to boost the demand for shares of stock? (Hint: Many private individuals and companies continued to seek to sell large amounts of shares of stock.)

Why do you suppose that same behavioral economists have criticized a recent decision by the United Kingdom's government to give people more freedom to sell off shares in their pension funds?

Classify the following items as either financial capital or physical capital.

a. A computer server owned by an information-processing company

b. $100,000set aside in an account to purchase a computer server

c. Funds raised through a bond offer to expand plant and equipment

d. A warehouse owned by a shipping company

Reconsider Table 21-1, and assume that as in Problem 21-23, you wish to save enough this year to have \( 50,000 available for your planned retirement 30 years into the future. How many dollars would you have to save this year to ensure that a total amount of \) 50,000 would be accumulated 30 years into the future if the interest rate appropriate for discounting decreases to 3 percent?

The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is 20percent and the personal income tax rate is localid="1653216490078" 30percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate.

a. If the owner of WebCity expects to earn localid="1653216495193" \(100,000in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen?

b. What is the dollar value of the after-tax advantage of the form of organization determined in part (a)?

c. Suppose that the corporate form of organization has cost advantages that will raise beforetax profits by localid="1653216505277" \)50,000. Should the owner of WebCity incorporate?

d. Based on parts (a) and (c), by how much will after-tax profits change due to incorporation?

e. Suppose that tax policy is changed to completely exempt from personal taxation the first localid="1653216517393" $40,000per year in dividends. Would this change in policy affect the decision made in part (a)?

f. How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships?
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