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Q39PGA_2

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Horngren'S Financial And Managerial Accounting
Found in: Page 718

Short Answer

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of $350,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

2. Would you recommend they initially issue preferred or common stock?Why?

Initially the corporation shall issue Common stock to raise the fund.

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Step by Step Solution

Step 1: Basic Introduction

Common stock is a share that addresses ownership in a corporation. Holders of common stock gets the voting rights such as they elect the board of directors and vote on policies related to corporation.

Step 2: Reason of initial issue

It is recommended to issue common stock initially as it is the major source of raising capital for a corporation. Issuing preference share at the initial stage of business is not favourable because generally dividend needs to be paid on preference stock.

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