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 warm temperatures, Hubbard only produced $300,000 of gross profit. Assuming Hubbard has no other sources of cash to make payments to its investors and creditors, which group is most likely to receive a lower payout than last year?

Group of answer choices

Debtholders

Common stockholders

Preferred stockholders

Answer 1

Out of a group of :

1. Debtholders

2. Common stockholders

3. Preferred stockholders

The highest priority of payment is made to debtholders followed by preferred stockholders and least priority is given to common stockholders. For this reason, common stockholders have the highest risk involved compared to other classes since debt holders and Preferred stockholders have a priority over common stockholders who generally enjoy residual profits.

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