Question

**Texas Tools Inc. has $20 million in earnings, pays $2.75 million in interest to bondholders, and pays $1.80 million in dividends to preferred stockholders.**

A. What are the common stockholders' residual claims to earnings?

B. What are the common stockholders' legal, enforceable claims to dividends?

Step 1

Calculating the value of common stockholder’s residual claims to earnings. We have,

Out of the total income, whatever income is not paid to the creditors, bondholders and preferred stockholders is the part of common stockholder’s income. This income is called residual claim to income by common stockholders.

Common stockholder...

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