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Chapter 5: 5DQ (page 564)

The common stockholders get the last claim on the organization’s assets and income as the other investors are paid fixed income based on the contracts signed at the time of providing the capital and the remaining income is usually distributed to the owners.

Short Answer

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The common stockholders get the last claim on the organization’s assets and income as the other investors are paid fixed income based on the contracts signed at the time of providing the capital and the remaining income is usually distributed to the owners.

Step by step solution

01

Meaning of owners of the company

The equity shareholders are the owners of the company.The capital invested by the equity shareholders provides them with the ownership share of the company and they also get voting powers to make decisions for the ccompany.

02

The reason that stockholders have the last claim on the assets and residual income

The owners of the organization have the last claim on its assets and residual income. The other investors receive a fixed income based on their contracts but the common stockholders have a claim on the income that is left after fulfilling all the obligations. If the organization is generating high profits, then the owners will get more income and vice-versa.

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Most popular questions from this chapter

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

Bailey corporation

Income statement

For the year 20X1

Sales (all on credit)

\(42,680,000

Cost of goods sold

\)32,240,000

Gross profit

\(10,440,000

Selling and administrative expenses

\)4,558,000

Operating profit

\(5,882,000

Interest expense

\)600,000

Net income before taxes

\(5,282,000

Taxes

\)2,120,000

Net income

\(3,162,000

Bailey corporation

Balance sheet

As of December 31, 20X1

Assets

Current assets:

Cash

\)250,000

Marketable securities

\(130,000

Accounts receivables

\)6,000,000

Inventory

\(8,300,000

Total current assets

\)14,680,000

Net plant and equipment

\(13,970,000

Total assets

\)28,650,000

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

\(3,800,000

Notes payable

\)3,550,000

Total current liabilities

\(7,350,000

Long-term liabilities

\)5,620,000

Total liabilities

\(12,970,000

Stockholder’s equity:

Common stock (1,800,000 shares at \)1 par)

\(1,800,000

Capital in excess of par

\)6,300,000

Retained earnings

\(7,580,000

Total stockholder’s equity

\)15,680,000

Total liabilities and stockholder’s equity

$28,650,000

d. Now assume that, of the initial 800,000 share distribution, 400,000 belong to current stockholders and 400,000 are new shares, and the latter will be added to the 1,800,000 shares currently outstanding. What will earnings per share be immediately after the public offering? What will the initial market price of the stock be? Assume a price-earnings ratio of 12, and use earnings per share after the distribution in the calculation.

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

b. Compute the earnings per share immediately before the stock issue.

In which foreign industry has privatization been most important?

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

d. Compute the EPS and the price (P/E stays constant) after the new production facility begins to produce a profit.

Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.

Size of Offer Public Price Net to Corporation

a. 1.1 million................. \(30 \)27.50

b. 7.0 million…………… \(30 \)28.44

c. 28.0 million………… \(30 \)29.15

What is the percentage underwriting spread for each size offer?
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