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A fiRm Has Two Classes of Common Stock Outstanding: Class

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Essay

A firm has two classes of common stock outstanding: Class A, which carries voting rights of 10 votes
per share but receives no dividends (ever), and Class B, which carries voting rights of one vote per
share and pays dividends whenever they are declared by the board. Which would you be willing to
pay more for and why?


Definitions:

Convertible Stock

Equity securities that can be converted into a predetermined number of common shares, at the option of the holder.

Callable Stock

A type of security that gives the issuer the right to buy back the shares at a predetermined price after a certain period.

Noncumulative Stock

Preferred stock where dividend payments are not accumulated if they are not declared, meaning shareholders may lose the right to dividends in missed payment periods.

Statement Of Stockholders' Equity

A financial statement showing changes in a company's equity, including net income, dividend payments, and stock issues or repurchases, over a period.

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