11 11 11

In general, common stockholders experience

greater risk and greater potential rewards than preferred stockholders. There are many diverse risk and reward factors associated with different types of stock. Common and preferred are two categories of stock ownership that commonly offer different risk and reward structures. In general, preferred stock carries lower risk factors than common stock. For example, it is common practice for preferred stockholders to have priority in business liquidations. In other words, if a business has to be liquidated, preferred stockholders are allowed to recover their investments before any funds are distributed to common stockholders. Another common risk preference assigned to preferred stock is that dividends are paid on preferred stock before they are paid to common stockholders. If profits are low, preferred stockholder may get paid while common stockholders get nothing. Accordingly, dividends on preferred stock are less risky than dividends on common stock. In exchange for lower risk, the amount of payments made to preferred stockholders are normally limited. For example, a preferred stock may state that dividends are paid at 5% of par value. Any excess is then paid to common stockholders. In this case, the common stockholder would benefit from high profits because the share distributed to the preferred holders would be limited. As a result, common stockholders are exposed to greater risk but have greater potential rewards compared to preferred shareholders.

Normally companies sell stock for an amount that is equal to the par value. less than the par value. more than the par value. None of the answers is correct.

more than the par value. Par value represents the legal capital that a company is required to maintain. If stock sells for an amount below par value the investors purchasing the stock may be required to transfer additional assets to the company in case of liquidation. Most investors are reluctant to accept the risk of having to make such additional transfers of assets. To avoid this situation, companies normally establish a par value that is well below the market value of the stock. As a result, stock frequently sells for amounts that are greater than the par value but seldom does it sell for an amount that is less than par.

liabilities is always

FA

The number of shares a corporation has outstanding may exceed the amount of shares authorized. This statement is

False The number of shares authorized is the maximum amount of shares a corporation can issue. Shares have to be issued in order to be outstanding. Therefore, the amount of shares outstanding cannot exceed the amount of shares authorized.

Which of the following is a disadvantage of a corporate form of business? Limited liability Transferability of ownership Double taxation Continuity of existence

Double taxation

net income is always

OA

A corporation may have issued more shares of stock than it has outstanding. This statement is

True Companies may issue shares and later buy those share back from the stockholders. The repurchased shares are called treasury stock. The amount of outstanding shares is equal to the amount of shares issued minus the treasury stock. As a result, if a company has treasury stock the number of shares issued will be greater than the number of shares outstanding.

Treasury stock is listed as the first account under the stockholders' equity section of the balance sheet. This statement is

True Normally, treasury stock is listed as the last account shown under the stockholders equity section of the balance sheet. The only item shown after the treasury stock account balance is the summary heading "Total Stockholders' Equity".

Which of the following is not a common characteristic associated with preferred stock?

Voting rights Normally, the right to vote on the membership of the board of directors and major policies and practices of operating the corporation are limited to common stockholders. However, even certain classes of common stock may be issued without voting rights.