After satisfying all creditor claims, a liquidating company has $5,000,000 available for shareholders. The company has 10,000 shares of preferred stock with a $100 per-share liquidation preference plus $10 per share of accumulated unpaid dividends, and 100,000 shares of common stock. The preferred stock is entitled to its liquidation preference plus accumulated dividends before common shareholders receive anything.
What is the per-share distribution to common shareholders? Answer: $39.00
The preferred claim is 10,000 x ($100 + $10) = $1,100,000, leaving $5,000,000 - $1,100,000 = $3,900,000 for 100,000 common shares, or $39.00 per share. The $40.00 figure subtracts the liquidation preference but ignores the accumulated unpaid dividends. The $50.00 figure ignores the preferred claim entirely. The $49.00 figure subtracts only the accumulated dividends and ignores the $100 per-share liquidation preference.
Rosa owns 500 shares of Marquee Manufacturing $100 par 6% convertible preferred stock. Each preferred share is convertible into common stock at a conversion price of $40. The preferred stock trades at $150 per share, and the common stock trades at $45 per share.
Which statement is correct? Answer: Rosa would receive 1,250 common shares; conversion value is $112.50 per preferred share, below $150, so converting would reduce value.
Conversion value is the market value of the common shares received upon conversion. At a $40 conversion price, each preferred share converts into $100 / $40 = 2.5 common shares, so 500 preferred shares become 1,250 common shares. Conversion value per preferred share is 2.5 × $45 = $112.50, below the $150 market price; converting would immediately reduce portfolio value. Comparing the common price to the conversion price is the wrong comparison; conversion value must be compared with the preferred market price. The $150 figure confuses market price with conversion value, and the 500-share figure misstates the conversion ratio.
Glenwood Industries has 100,000 shares of $100 par, 8% cumulative, nonparticipating preferred stock and 400,000 shares of common stock outstanding. The preferred dividend was omitted for the last two years. In the current year, the board declares total cash dividends of $3,600,000.
What is the maximum common dividend per share that Glenwood can pay? Answer: $3.00
Cumulative preferred dividends in arrears must be paid before common shareholders receive anything. The annual preferred dividend is 100,000 x $100 x 8% = $800,000. Two omitted years create $1,600,000 of arrears, and the current year requires another $800,000, so preferred shareholders must receive $2,400,000. That leaves $1,200,000 for 400,000 common shares, or $3.00 per share. The $5.00 figure ignores the current-year preferred dividend; the $7.00 figure ignores the two years of arrears; the $9.00 figure ignores the preferred claim entirely.
- Under standard T+1 settlement, which of the following statements regarding entitlement to a declared cash dividend is true?
Answer: An investor who purchases the stock on the ex-dividend date will not receive the dividend; the seller of the stock receives it.
Dividend entitlement under T+1 settlement. Since T+1 regular-way settlement took effect on May 28, 2024, the ex-dividend date is the same business day as the record date. A purchaser who buys on the ex-dividend date settles one business day after the record date, so the purchaser is not the holder of record and the seller receives the dividend. The statement that the ex-dividend date is one business day before the record date applies the old T+2 convention; under T+1 a purchase one business day before the record date settles on the record date and does receive the dividend. Ownership on the payment date does not determine entitlement; entitlement is fixed by the record date. The declaration date is not the cutoff; a buyer who buys after the declaration date but before the ex-dividend date still receives the dividend.
An investor owns shares of a 6% convertible preferred stock with a $100 par value. The preferred stock is convertible into common stock at a conversion price of $50 per share. The issuer has called the preferred stock for redemption at $105 per share, and the underlying common stock is currently trading at $60 per share.
What is the dollar advantage, per share of preferred stock, of converting rather than accepting the call price? Answer: $15
Conversion value of convertible preferred stock. The conversion ratio is the par value divided by the conversion price: 100 / 50 = 2 shares of common stock for each preferred share. The conversion value is therefore 2 x $60 = $120 per preferred share. Because the issue has been called at $105, the investor compares the conversion value with the call price, and converting produces an advantage of $120 - $105 = $15 per share. The 6% dividend rate is not part of this comparison. The $5 figure is the call premium ($105 - $100 = $5) and ignores the conversion value entirely. The $10 figure is the common stock's market price minus the conversion price ($60 - $50 = $10) and ignores the 2-for-1 conversion ratio. The $20 figure is the conversion value minus the par value ($120 - $100 = $20), which compares conversion to the wrong benchmark; the $105 call price is the relevant alternative once the issue is called.
- Which statement about common and preferred stock is correct?
Answer: Callable preferred stock is usually called by the issuer when interest rates fall, and the call price is normally set at a premium above par.
Common and preferred stock characteristics. The correct statement is the one describing callable preferred stock: an issuer typically exercises a call after interest rates have fallen so it can retire a high-dividend issue and refinance at a lower rate, and the call price is normally set above par to compensate the holder for the forced redemption. The statement that preferred stockholders generally have the same voting rights as common stockholders and that both classes rank ahead of bondholders is wrong: preferred stock is generally non-voting, with voting rights typically arising only when dividends are in arrears or on matters affecting the class, and both equity classes rank behind all creditors in liquidation. The statement that common stockholders must receive a dividend when earnings are sufficient is wrong: common dividends, like preferred dividends, are declared at the board's discretion and are never mandatory. The statement that preferred stock usually has a stated maturity date is wrong: preferred stock is equity and normally has no maturity date; the part about adjustable-rate preferred resetting from a benchmark is true, but the statement as a whole is false.
- A preferred stock has a $100 par value and is convertible into common stock at a conversion price of $40 per share. The common stock is trading at $50 per share, and the preferred stock is trading at $115 per share. Which of the following statements is true?
Answer: The preferred's conversion value is $125, so it is trading at a $10 discount to its conversion value.
Convertible preferred valuation. The conversion ratio is par value divided by the conversion price: $100 / $40 = 2.5 shares of common per preferred share. The conversion value is the ratio multiplied by the current common price: 2.5 x $50 = $125. Because the preferred trades at $115, it is $10 below its conversion value, so it trades at a discount; conversion would produce an immediate $10-per-share gain before transaction costs. The $100 figure results from multiplying the conversion ratio by the conversion price rather than by the common stock's market price. The $115 figure merely repeats the preferred's market price and ignores the common stock price. The option that states a $125 conversion value and a $15 premium also uses the correct conversion value but misstates the comparison: a security selling below its conversion value is at a discount, and the correct discount is $10, not $15.
A manufacturing company has 50,000 shares of 8% non-cumulative preferred stock outstanding, with a $100 par value, and 200,000 shares of common stock outstanding. The company paid no dividends in 2024 or 2025. In 2026, the board of directors declares a total dividend of $1,600,000, paying the current preferred dividend first.
What dividend will each share of common stock receive? Answer: $6.00
Dividend preference of non-cumulative preferred stock. Because the preferred stock is non-cumulative, the dividends skipped in 2024 and 2025 are lost forever; the preferred holders are entitled only to the current year's dividend before common stockholders are paid. The current preferred dividend is 50,000 x $100 x 8% = $400,000, leaving $1,600,000 - $400,000 = $1,200,000 for the common stock, or $1,200,000 / 200,000 = $6.00 per common share. The $2.00 figure results from treating the preferred as cumulative and reserving three annual preferred dividends (2024, 2025, and 2026) before paying common. The $4.00 figure results from paying the preferred holders for the two skipped years but overlooking the current year's preference. The $8.00 figure ignores the preferred dividend entirely and divides the full $1,600,000 by the 200,000 common shares.
Nordic Corporation has 900,000 common shares outstanding. A shareholder owns 90,000 shares, or 10%. The company plans to issue 100,000 new common shares in a public offering. The shareholder has preemptive rights.
If the shareholder wishes to preserve her proportionate ownership, how many of the new shares should she purchase? Answer: 10,000 shares
Preemptive rights allow existing shareholders to maintain their proportionate ownership by purchasing a proportional share of a new offering. A 10% shareholder is entitled to purchase 10% of the 100,000 new shares, or 10,000 shares. That gives her 100,000 shares out of 1,000,000 outstanding, still 10%. Buying 90,000 shares assumes one new share for each old share; buying 100,000 assumes the right to buy the entire offering; buying 9,000 incorrectly applies the 10% ratio to her current holdings rather than to the new shares.
An investor is comparing two otherwise identical preferred stock issues of the same company. One issue is noncallable; the other is callable at $105 after five years.
Which statement about the callable issue is correct? Answer: The issuer will likely call the preferred when interest rates fall, exposing the holder to reinvestment risk.
A call feature benefits the issuer: when interest rates fall, the issuer can redeem the preferred and replace it with lower-cost capital. The holder then faces reinvestment risk at lower yields. The call price is not a market-price floor; if rates rise, the preferred can trade well below the call price. Because the call feature is unfavorable to the holder, a callable issue normally must offer a higher dividend, not a lower one. Calling an issue when rates rise would force the issuer to refinance at a higher cost, which is the opposite of the usual call logic.
- A corporation has 1,200,000 shares of common stock outstanding, and all outstanding shares will be voted at the annual meeting. Seven directors are to be elected. Under cumulative voting, what is the minimum number of shares a shareholder must control to be certain of electing two directors to the board?
Answer: 300,001 shares, one-quarter of the outstanding shares plus one share
Under cumulative voting, the minimum share requirement to guarantee electing D directors is (shares outstanding × D) ÷ (directors to be elected + 1), plus one share, assuming all outstanding shares are voted. Here: (1,200,000 × 2) ÷ (7 + 1) = 300,000, so 300,001 shares are needed. The 150,001-share figure is the amount required to guarantee only one director, using one desired seat in the formula. The 300,000-share figure is one-quarter of the outstanding shares but omits the additional share needed to break the tie at the threshold and guarantee the outcome. The 342,857-share figure, two-sevenths of the shares, is a proportional allocation rather than the cumulative-voting minimum; it is not the minimum number required.
- All of the following are characteristics of preferred stock EXCEPT:
Answer: Holders are legally entitled to the stated dividend in any year the corporation has sufficient earnings.
Preferred stock characteristics. The statement that holders are legally entitled to the stated dividend in any year the corporation has sufficient earnings is false and is the exception: preferred dividends, like common dividends, are payable only when declared by the board of directors and are not guaranteed. The fixed-dividend statement is true: preferred dividends are typically stated as a percentage of par value or as a fixed dollar amount. The statement that holders generally lack voting rights except in arrears or fundamental-change situations is also true. The liquidation-priority statement is true: preferred claims rank above common stock but below the corporation's debts.
Atlas Corporation has 10,000 shares of $100 par, 6% participating preferred stock and 40,000 shares of common stock. Under the participation provision, after preferred shareholders receive a $6 per-share dividend and common shareholders receive an equal $6 per-share dividend, any additional dividends are shared equally on a per-share basis. The board declares $420,000 of dividends.
What amount of the dividend is paid to the preferred shareholders? Answer: $84,000
The first distribution is 10,000 x $6 = $60,000 to preferred and 40,000 x $6 = $240,000 to common, totaling $300,000. The remaining $420,000 - $300,000 = $120,000 is shared equally per share across 50,000 shares, or $2.40 per share. Preferred receives an additional 10,000 x $2.40 = $24,000, for a total of $84,000. The $60,000 figure ignores participation; the $180,000 figure gives the entire remaining dividend to preferred; the $210,000 figure splits the total dividend equally between the two classes rather than per share.
- Which of the following statements regarding common stock is true?
Answer: Outstanding shares equal issued shares minus treasury shares, and treasury shares are excluded from the earnings-per-share calculation.
Common stock share classifications. Authorized shares are the maximum the corporation may issue under its charter; issued shares are those actually sold; outstanding shares are issued shares held by investors. Treasury shares are issued shares the corporation has repurchased; they are not outstanding, carry no voting or dividend rights, and are excluded from the earnings-per-share denominator. Outstanding shares therefore equal issued shares minus treasury shares. The statement that all authorized shares are entitled to vote is wrong: authorized but unissued shares are not outstanding and cannot vote. The statement that issued shares include authorized shares not yet sold confuses issued shares with authorized shares. The statement that treasury shares remain outstanding for voting and dividend purposes is wrong: treasury shares are not outstanding and carry no voting or dividend rights.
