Question 1: Outline the differences between common stock and preferred stock? (3
ID: 2803834 • Letter: Q
Question
Question 1: Outline the differences between common stock and preferred stock? (3 Marks)
Question 2: What are the differences between capital projects that are independent, mutually exclusive, and contingent? (3 Marks)
Question 3: Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project? (4 Marks)
Explanation / Answer
Question 1). Answer :- Difference between preferred stock and common stock :-
Question 3). Solution :-
Net present value (NPV) of project = Present value of cash inflows - Present value of cash outflow.
Present value of cash inflows = 520000 / (1.10)1 + 700000 / (1.10)2 + 1000000 / (1.10)3
= 520000 / 1.10 + 700000 / 1.21 + 1000000 / 1.3310
= 472727.27 + 578512.40 + 751314.80
= $ 1802554.47 (approx)
Present value of cash outflow = $ 2000000. ( 1 Million = 1000000, Accordingly, 2 Million = 2000000).
Accordingly, Net present value (NPV) of the project = 1802554.47 - 2000000
= (-) 197445.53 Dollars.
Conclusion :- Net present value (NPV) of project = (-) 197445.53 Dollars.
(Note :- Since the net present value (NPV) of project is in negative, Accordingly, The project should not be accepted.)
Basis of difference Preferred stock Common stock 1). Right to dividend Dividend is paid on preferred stock before it is paid on common stock. Dividend is paid on common stock after it is paid on preferred stock. 2). Rate of dividend Rate of dividend on preferred stock is fixed. Rate of dividend on the common stock is decided every year by the Board of directors (BODs). 3). Convertibility Preferred stock may be converted to common stock if the terms of issue provide so. Common stock are not convertible at all.Related Questions
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