How are preliminary levels of debt, preferred stock, common stock, and dividends projected?

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How are preliminary levels of debt, preferred stock, common stock, and dividends projected?

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How are preliminary levels of debt, preferred stock, common stock, and dividends projected?

Explanation & AnswerSolution by a verified expert

Explanation

Dividends of a firm are projected as per the past trends, that is, if they are growing at a constant rate or growing with profits earned every year unless there is a change in trends. For example, if the management discussion and analysis (MD&A) section of the annual report states that the company is planning to increase the dividend, then such increase is incorporated for the computation of projected dividend.
 
Preferred stock, common stock and debt are also projected on the basis of past and future expected trends of the company unless there is a change in trend for maintaining preferred or common stock and debt in its capital structure. For example, if a firm is facing the cost of financial distress by increasing debt in its structure, then it should reduce the risk by repaying debt and issuing preferred or common stock.

Verified Answer

Preliminary level of debt, preferred stock, common stock and dividends are projected on the basis of past and future expected trends of the company. However, if its policy changes regarding proportion of debt in the capital structure, maintaining preferred and common stock, rate of dividends, the change is then incorporated in the projected financial statement.

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