e.
f.
The two principal factors that cause one preferred to yield less than another are: (1) the
appearance of greater ability to pay the preferred dividends each year, and (2) special
features that appeal to investors, such as Toasty’s conversion feature, cumulative
dividends, or a high call price.
The basic advantage of being publicly owned is that the corporation has the opportunity to
raise large amounts of equity capital from many investors. Some publicly owned
corporations have millions of stockholders, including pension funds, mutual funds, and
regulations and financial reporting requirements.
PROBLEM 11.6B
TIMBERLAKE CORPORATION (concluded
)
The term convertible means that at the option of the preferred stockholder, each preferred
share can be converted into a specified number of common shares. To evaluate the value of
this conversion feature, the stockholder must know into how many shares of common each
preferred share can be converted. This information is disclosed in the notes accompanying
of the stock. The lower the yield, the more investors favor the stock. A higher yield means
that investors demand a higher return to induce them to purchase the stock.
15 Minutes, Easy
a.
b.
PROBLEM 11.7B
WHITAKER VIDEO
Par value is the legal capital per share—the amount by which stockholders’ equity cannot
be reduced except by losses. Thus, par value may be viewed as a minimum cushion of
equity capital existing for the protection of creditors.
Whitaker Video’s par value—five cents per share—is quite low. However, the corporation
can set par value at any level that it chooses; the amount of par value has no direct effect
upon either book value or market value. It does mean, however, that the amount of the
30 Minutes, Strong
Stockholders’ e
q
uit
y
:
6%
p
referred stock, $100
p
ar, cumulative, authorized and
issued and outstandin
g
10,000 shares 1,000,000$
Common stock, $20
p
ar, 150,000 shares authorized,
80,000 shares issued, of which 400 shares are held in
PROBLEM 11.9B
a. LAIRD INDUSTRIES
December
31
,
2015
Partial Balance Sheet
LAIRD INDUSTRIES
15 Minutes, Medium
a.
b.
c. The market price of the 7%, $100 par value convertible preferred stock should rise
The current market price of the convertible preferred stock is too high to be explained by its
The market price of the 10%, $100 par value preferred stock may be expected to decline
gradually as long-term interest rates rise. The market price of preferred stock tends to vary
inversely with the level of interest rates.
SOLUTIONS TO CRITICAL THINKING CASE
S
FACTORS AFFECTING THE MARKET PRICE
S
CASE 11.1
If SciFi’s profitability increases dramatically, the market price of its common stock probably
OF PREFERRED AND COMMON STOCKS
25 Minutes, Strong
OF COMMON STOCKS
a.
CASE 11.2
The value of a share of common stock is based on investors’ expectations about future earnings and
cash flows of the business. The increase in the price of the shares of McDonnell Douglas resulted from
an increase in investors’ expectations about future earnings of the company based on this large order by
Saudia Airlines.
FACTORS AFFECTING THE MARKET PRICE
S
Group assignment:
No time estimate
CASE 11.3
• Among the “unforeseen complications” that often come to light are the problems when
partners do not see eye to eye, and the costs and complications resulting from the
corporation being a taxable entity.
• The normal reason why a business may change its form of entity is to attract more capital.
• Some students may encounter professional corporations, which often are used by one or
more members of a partnership. These professional corporations are intended to limit the
individuals’ personal liability—although they require the individual to carry “malpractice”
insurance and do not exonerate them from liability for some types of professional
misconduct. They may also encounter S corporations, which, for tax purposes, are treated as
unincorporated organizations.
SELECTING A FORM OF ORGANIZATIO
N
We do not provide comprehensive solutions for group problems that involve interviews. But the
following items normally come to light in our classes.
• Students may find that many people entered a business without giving much thought to the
form of entity.
20 Minutes, Medium
(a)
(
b
)
(
)
ETHICS, FRAUD & CORPORATE GOVERNANC
E
The divisions of the Securities and Exchange Commission are:
Risk, Strategy, and Financial Innovation
CASE 11.
4
S.E.C. ENFORCEMENT DIVISION
Corporate Finance
The Division of Enforcement investigates possible violations of securities laws, recommends
Enforcement
Investment Management
Trading and Markets
30 Minutes, Easy
a.
[NOTE: The numbers in parts b. and c. will vary depending on the most recent balance used to
answer these questions.]
EXAMINING STOCKHOLDERS’ EQUITY
CASE 11.5
The company’s balance sheet dated February 2, 2013, reports that five million shares of $0.01
par preferred stock have been authorized. However, as of this date, none of these shares has
been issued.
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