Rupert Is Starting Up a New High Tech Business and Needs

question 66

Essay

Rupert is starting up a new high tech business and needs to be able to attract some of the best computer programmers available. He has set up a corporation to carry on the business. It has two classes of shares, common shares which vote, are entitled to receive dividends and the remaining property of the corporation on dissolution, and Class A preferred shares which do not vote but are entitled to an annual dividend of 10 percent of the issue price and, on dissolution, to receive the amount invested in return for the preferred shares. Dividends on the Class A preferred shares must be paid before any dividends are paid on the common shares. Also, no payment on dissolution can be made to the holders of the common shares until payment is made to the holders of Class A preferred shares. Rupert holds all of the 100 common shares the corporation has issued. He expects that the common shares of the business will be sold in a couple of years for an enormous profit because the business will grow very fast. No Class A preferred shares have been issued. In order to attract programmers, Rupert wants to be able to offer them shares in his corporation in addition to paying them a good salary. What kind of shares should these be? Are there any concerns Rupert should have regarding his strategy?

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Definitions:

Demand Decreases

A decrease in the quantity of a product or service that consumers are willing and able to purchase at given prices.

Tax on Buyers

A fiscal charge imposed directly on purchasers, which shifts the demand curve downward, reflecting a decrease in the net price received by sellers.

Tax Burden

The measurement of taxes that a person or business must pay, often expressed as a percentage of income or profit.

Buyer Pays

Refers to the economic principle that the buyer is responsible for paying the price of a good or service, including any taxes or fees associated with the purchase.