Assume that you have decided to invest a portion of your money in the stock mark
ID: 2532188 • Letter: A
Question
Assume that you have decided to invest a portion of your money in the stock market. You ask your broker to recommend several preferred stocks for you to consider as an investment. Your broker recommends the following two companies. Both are start-up corporations, but you agree with your broker that both have excellent potential for the future.
Company A: Noncumulative, preferred stock with a $4-per-year dividend rate. Each share of this stock will cost you $20.
Company B: Cumulative, preferred stock with a $4-per-year dividend rate. Each share of this stock will cost you $25.
You have decided to invest in only one of the companies. State which company you would choose and why
Explanation / Answer
I Will Invest in Company B.
Since both, the companies are Start-up corporations so the profit of the company may not be stable. And If the company A decides not to pay the dividend in any year we will lose the dividend right of that year. But in Case of Company B Unpaid dividend will be accumulated and will be paid in next year. So I will have earning certainty if I invest in Company B. We are incurring the extra cost of just $ 5 and getting entitled to the divided of $ 4 every year. So the Cost-benefit is also in the favour of Company B.