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Chapter 13: Q46PGB_2 (page 721)

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of $550,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

2. Would you recommend they initially issue preferred or common stock? Why?

Short Answer

Expert verified

Answer

It is recommended to initially issue common stock to gain the growth advantage.

Step by step solution

01

Common stock definition

Common stock is an ownership share in a corporation that makes the stockholders owner of the company to the proportion of shares they hold. It allows the stockholders voting rights at meetings and the opportunity to receive dividends.

02

Recommendation-

They should initially issue common stock as they get the advantage of growth company as a corporation their major purpose is reinvestment of earnings in the business for expansion. Issuing preferred stock will lead them to pay mandatory dividend payment to the shareholders of the corporation that will lead to earnings distribution.

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Most popular questions from this chapter

What is a corporation?

Computing price/earnings ratio Refer to the HEB data in Short Exercise S13-17. Assume the market price of HEB’s common stock is $19.50 per share. Compute HEB’s price/earnings ratio.

Journalizing issuance of stock

Steller Systems completed the following stock issuance transactions:

May 19 Issued 1,700 shares of \(3 par value common stock for cash of \)10.50 per share.

Jun. 3 Issued 300 shares of \(9, no-par preferred stock for \)15,000 cash.

11 Received equipment with a market value of \(68,000 in exchange for 5,000 shares of the \)3 par value common stock.

Requirements

1. Journalize the transactions. Explanations are not required.

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of \(350,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

3. If they decide to issue \)5 par common stock and anticipate an initial market price of \(20 per share, how many shares will they need to issue to raise \)2,750,000?

On August 1, Hagino Corporation declared a $1.50 per share cash dividend on its common stock (20,000 shares) for stockholders on record as of August 15. Hagino paid the dividend on August 31. Journalize the entries declaring the cash dividend and paying the dividend.
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