Answers1 - Chapter 2 End of Chapter Problems 1(e All of the...

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Chapter 2, End of Chapter Problems 1. (e) All of the above are true about preferred stocks. 2. (b) Taxation . Corporations may exclude 70% of dividend received from other domestic corporations in the computation of taxable income. Preferred stocks, therefore, make desirable fixed-income investments for some corporations. This tax advantage lowers the required rate of return (yield) on preferred stock. 4. Bond like features: It promises to pay a fixed stream of income each year. It does not give the holder voting rights. Equity like features: The firm retains the discretion to make dividend payments to the preferred stockholders. (Remember, unpaid dividends are cumulated and the corporation cannot pay dividends to its common stockholders before paying the dividend for preferred stockholders.) Dividend payments on preferred stock are NOT tax deductible for the corporation who issues the preferred stock. (Interest expenses on bonds are tax deductible) Also, in case of bankruptcy, preferred stockholders are not paid anything until all the bondholders are fully paid off. In other words, preferred stock is junior to all debt. In addition, preferred stockholders, unlike bondholders, cannot force liquidation of the company if the dividends are not paid. 7.
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This note was uploaded on 04/15/2009 for the course ACCOUNTING BUSI0027 taught by Professor Guan during the Spring '09 term at HKU.

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Answers1 - Chapter 2 End of Chapter Problems 1(e All of the...

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