A Company Has Outstanding 10 Million Shares of $2 Par

question 7

Multiple Choice

A company has outstanding 10 million shares of $2 par common stock and 1 million shares of $4 par preferred stock.The preferred stock has an 8% dividend rate.The company declares $300,000 in total dividends for the year.Which of the following is true if the preferred stockholders have a cumulative dividend preference?

• A)Preferred stockholders will receive the entire $300,000,and they must also be paid $20,000 before the end of the current accounting period.Common stockholders will receive nothing.
• B)Preferred stockholders will receive $24,000 (8% of the total dividends).Common stockholders will receive the remaining $276,000.
• C)Preferred stockholders will receive the entire $300,000,and they must also be paid $20,000 sometime in the future before common stockholders will receive anything.
• D)Preferred stockholders will receive the entire $300,000,but will receive nothing more relating to this dividend declaration.Common stockholders will receive nothing.

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Definitions:

Cost of Capital

The rate of return a firm must earn on its investments to maintain its market value and attract funds.

DCF Approach

The Discounted Cash Flow approach, a valuation method used to estimate the value of an investment based on its future cash flows.

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements, often calculated using the Capital Asset Pricing Model (CAPM).

WACC Calculation

The process of determining a company's Weighted Average Cost of Capital, incorporating the costs of equity, debt, and any other forms of financing.