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Horngren'S Financial And Managerial Accounting
Found in: Page 721

Short Answer

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of $550,000 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?

Answer

It is recommended to initially issue common stock to gain the growth advantage.

See the step by step solution

Step by Step Solution

Step 1: Common stock definition

Common stock is an ownership share in a corporation that makes the stockholders owner of the company to the proportion of shares they hold. It allows the stockholders voting rights at meetings and the opportunity to receive dividends.

Step 2: Recommendation-

They should initially issue common stock as they get the advantage of growth company as a corporation their major purpose is reinvestment of earnings in the business for expansion. Issuing preferred stock will lead them to pay mandatory dividend payment to the shareholders of the corporation that will lead to earnings distribution.

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