Question

Please select that whether below statements are correct or not?

1. Common stock cannot be worth less than the firm's book value of equity.
2. Convertibility, a common feature of common stock, allows the common stockholders to convert their shares into preferred shares or into bonds.
3. Dividend payments, like interest payments on debt, are fixed.
4. Limited liability for a corporation's common shareholders is a protective provision that aids the corporation in raising funds.

Answer 1

Only the fourth statement is correct

Step-by-step explanation:

The first statement is wrong as stock price can be worth less than its book or par value depending on the performance of the company from which the stock price derives its value.

The second statement is also not correct as convertibility implies that holders of preference shares or bonds are able to convert their holdings into a known quantity of common stock in the future not the other way round.

Dividend payments are fixed for only preferred stockholders,common stockholders are exposed to variable dividend payments which dependent on the performance of the company and the also the company's need for cash.

Limited liability is a protective provision as it aids corporation in raising funds as the investors are certain that their liability in case of the company in the event of the going bankrupt is limited to the amount invested in the company unlike sole proprietorship that could be made to pay debts from private pockets