tailieunhanh - Accounting and Finance Revision Notes_6

Tham khảo tài liệu 'accounting and finance revision notes_6', tài chính - ngân hàng, kế toán - kiểm toán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | Financing CHAPTER 5 Preferred stock may have sinking fund provisions for the repurchase of the stock. Debt holders have a superior claim to assets in case of liquidation and have first claim to earnings. However preferred stockholders claims are superior to common stockholders . Taxes affect the amount of earnings needed to meet debt service and preferred stock dividends. However because they receive different tax treatment they affect earnings differently. Suppose that both debt and preferred stock command a return of 12 percent and the applicable corporate tax rate is 46 percent. To pay the 12 percent interest rate on debt the firm has to earn 12 percent before taxes. Interest on debt is paid in before-tax dollars. To pay the 12 percent dividend for preferred stock the firm has to earn 12 percent in after-tax dollars. For a 12 percent earnings after taxes percent 12 percent 1 - .46 is required in before-tax dollars. Because dividends are paid in after-tax dollars the firm has to earn more to pay a dividend of comparable worth to an investor than it has to earn for interest. The tax rate the company pays will have a great deal to do with the amount of dividend paid for two reasons 1. The lower the company s real tax rate the more disposable cash it will have to reinvest and pay dividends. 2. The lower the company s tax rate the more flexibility it can have in designing dividend policies to be attractive to investors and enhance the goodwill and value of the firm. Private Placement of Stock A company may find itself with an excessive proportion of debt in relation to its equity or there is no way to obtain additional debt forcing the owner to go in search of equity. A private company accomplishes this through a private stock placement where shares are sold to a limited number of individuals or business entities. It may be possible for company management to sell shares on an informal basis to friends and family but this is at best a limited 157 SECTION II .