Companies a and B Recently Established a New Jointly Owned

question 55

Multiple Choice

Companies A and B recently established a new jointly owned subsidiary,ABBA Corporation.ABBA now requires $100 million of capital.A and B will supply $40 million of common equity,$20 million each.The remaining $60 million will be raised by using some combination of debt and preferred stock.Which of the following statements is most correct?

• A) The interest rate on the debt would be higher if ABBA uses $60 million of debt and $0 preferred than it would be if ABBA uses $30 million of debt and $30 million of preferred.
• B) Because 70 percent of preferred stock dividends received are excluded from a corporation's taxable income,(1)most preferred stock is owned by corporations,and (2)frequently a company's bond interest rate is higher than its preferred stock dividend yield.
• C) If ABBA's preferred stock were made convertible into its common,the preferred would have a lower dividend yield than if the preferred were nonconvertible.
• D) All of the above statements are true.
• E) Only answers a and b above are true.

---

Definitions:

Ethical Decisions

Choices made based on moral principles and values, aiming to do what is right and fair in a given situation.

Code of Ethics

A set of principles and guidelines designed to help professionals conduct business honestly and with integrity.