Rupert Is Starting Up a New High-Tech Business and Needs

question 59

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,and 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:

Change in Net Working Capital

The difference between the current assets and current liabilities from one period to the next, reflecting changes in liquidity and operational efficiency.

Average Tax Rate

The ratio of the total amount of taxes paid to the total tax base (taxable income or spending), representing the average tax burden.

Capital Gains

The profit earned from the sale of assets like stocks, bonds, or real estate, which exceeds the purchase price.

Non-Eligible Dividends

Dividends paid from earnings that are not eligible for the enhanced dividend credit in certain jurisdictions, typically leading to higher tax rates for the recipient than eligible dividends.