4.2 Stock

Question 1

Common Stock : Advantage to Issuer

DC,MaG

Answer 1

• Dividend not Required as debt payments
• No fixed maturity as Debt
• Increases Creditworthiness (capital cushion for debtors)
• Attractive because shareholders participate in growth

Question 2

Common Stock: Disadvantage to Issuer

DC, NUTI

Answer 2

• Dividends not tax-deductible
• Control - Voting rights diluted
• New Common Stock - Dilutes EPS available to existing
• Underwriting costs are high
• Too much equity may increase cost of capital above optimal
• Inflation (bond yields) may make stock less attractive, less funds for dividends

Question 3

Preemptive Rights (Common Stock)

Answer 3

Rights to buy stock in proportion to holdings

_ Warrant is issued with Rights to buy certain number of shares at a Specific Price

Question 4

Par Value (Common Stock)

Answer 4

The maximum liability of a shareholder

- Arbitrary value

Question 5

Preferred Stock (Definition)

Answer 5

• Hybrid of Debt and Equity
• Have priority over Common in bankruptcy
• CUMULATIVE Dividends have to be paid before Common Dividends can be paid

Par Value - the liquidation value of Preferred

Question 6

PARTICIPATING Preferred Stock

Answer 6

• Will be paid more than stated rate in good years

- NON PARTICIPATING - paid no more than stated rate

Question 7

TRANSIENT Preferred Stock

Answer 7

Must be redeemed in a short period

Question 8

Preferred Stock - Voting Rights

Answer 8

• Normally no voting rights, unless Dividends are in arrears for a STATED PERIOD

Question 9

Preferred Stock ; Advantages to Issuer

CCS

Answer 9

• Creditworthiness: Like Common: builds creditworthiness
• Control still held by common
• Superior earnings still held by Common

Question 10

Preferred Disadvantage to Issuer

DDArrears

Answer 10

• Dividends not deductible

- Dividends in arrears could cause financial stress

Question 11

Preferred Stock - Redeemability

Answer 11

HOLDER my redeem when he wants. (makes it like debt)

see Transient Preferred Stock