Second Company's preferred stock is 8%, cumulative. A provision of the stock agreement specifies that the stock
must be redeemed at face value in five years.
- It appears that the loan payable of First Company and the preferred stock of Second Company are very similar. What are the differences between the two securities?
- When calculating the debt-to-equity ratio, do you believe that the Second Company preferred stock should be treated as debt or as stockholders' equity? Write a statement expressing your position on the issue.
Rohnan Inc. needs to raise $500,000. It is considering two options:
- Issue preferred stock, $100 par, 8%, cumulative, nonparticipating, callable at $110. The stock could be issued at par.
- Issue common stock, $1 par, market $10. Currently, the company has 400,000 shares outstanding distributed equally in the hands of five owners. The company has never paid a dividend.
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