Question

Hubbard Heaters Inc. is financed 30% with common equity, 30% with preferred equity and 40% with debt. Total payments made to these financiers last year was $500,000. This year, due to unseasonably cold temperatures, Hubbard has excess cash of $1,000,000. Assuming all expenses have been paid and all positive NPV projects have been undertaken, which group is most likely to receive an extra payout beyond what it is owed?

Preferred stockholders

Common stockholders

Debtholders

Answer 1

Common stockholder will always be having a higher share on all those profits of the company after the debtholders and preferred shareholders have been paid because the preferred shareholders and debtholders are creditors to the company and they will not be paid in additional after their debt has been repaid with periodic debt repayment, where as common stockholders will be always having an additional risk and these common stakeholder does not have any kind of mandatory payment from the company but when there is excess cash available to the company company will be trying to pay them with dividend or they will be trying to utilise through stock repurchase so ultimate beneficiary of excess cash of the company will be common stockholders.

Correct answer will be option (B) Common Stockholders.