Chapter 14, Problem 14.1PQ1

Summary Introduction

To determine:

Reason for issue of common stock.

Introduction: Common stock refers to a type of security which has ownership rights too. Common stockholders are the owners of the company. Common stock consists of highest risk among the securities issued by a company.

Answer to Problem 14.1PQ1

Solution:

Company issue common stock to raise capital and they prefer to issue common stock because they don’t have to give principal amount back and dividend is not mandatory.

Explanation of Solution

Company issue common stock because they want to raise capital to run company. They prefer financing from common stock because of these reasons,

• No repayment of principal amount: While issuing the common stocks, a company doesn’t have to pay back the principal amount in future that they received from common stockholders.
• Dividend not mandatory: The other reason for the issue of common stock is that they don’t have to give a dividend every year to shareholder. They can give dividend whenever they want. Although company tries to give dividend regularly to maintain its goodwill.

Hence, company likes to issue common stock because of the benefit of not paying principal amount back and dividend is not mandatory.