A key advantage of issuing preferred shares to Curtis’s dad and Natalie’s grandmother is that they will receive higher and more regular dividends than when issued with common stock. Preferred stock normally comes with a declared dividend. This scenario makes preferred stock a fixed income security. In addition, preferred stock offers a stronger bankruptcy shield than common shares do. Preferred stock dividends are paid before common stock dividends. In this scenario, the promise of more consistent and stable payments is likely to Curtis’s dad and Natalie’s grandmother to part with more money when investing in the entity. Resultantly, Cookie & Coffee Creations Inc. may receive additional funding from the two investors. From the company’s point of view, the callability of preferred stock is another advantage of preferred stock. Cookie & Coffee Creations Inc. can recall preferred shares and reissue them to reduce dividend payments in line with the prevailing interest rates. In this case, when there is an economic downturn, the entity can preserve more of its cash resources. Another benefit is associated with their lack of voting rights. When Cookie & Coffee Creations Inc. issues preferred shares to Curtis’s dad and Natalie’s grandmother, Curtis and Natalie will maintain control in their company since they will be the only individuals with voting rights.
Curtis and Natalie can offer common shares rather than cash to their lawyer in exchange for her legal services. Such a transaction, known as a related party transaction, may create a conflict of interest, but it is legal. Curtis and Natalie should give their lawyer 750 common shares since the fair value of each common stock is $1, and the lawyer paid them $750. The fair value of $1 per share will ensure that the common stock is valued appropriately.
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