4. Which of the following is the best conclusion, given only the following information:
ZYX Corporation’s earnings after taxes have declined by 3.13% from the year earlier.
During the past three months, ZYX purchased from investors (retired) 7.5% of the
corporation’s outstanding preferred stock shares, which pay dividends at 5% of par.
A. ZYX Corporation’s net income decline is largely attributable to the expense it
incurred to purchase its preferred stock.
B. ZYX Corporation’s preferred stock purchase should enhance earnings after taxes next
year because it will earn 5% dividend income from its new preferred stock holdings.
C. ZYX Corporation’s purchase of preferred stock had no effect on the firm’s asset balance.
D. ZYX Corporation’s purchase of preferred stock improved its capacity to pay preferred
stock dividends.
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To determine the best conclusion based on the given information, let's analyze each option:
A. ZYX Corporation’s net income decline is largely attributable to the expense it incurred to purchase its preferred stock.
This option suggests that the decline in net income is primarily due to the expense of purchasing preferred stock. However, there is no information about the expense incurred or its impact on net income mentioned in the given information. Therefore, option A cannot be concluded based on the provided details.
B. ZYX Corporation’s preferred stock purchase should enhance earnings after taxes next year because it will earn 5% dividend income from its new preferred stock holdings.
According to the information, ZYX Corporation purchased preferred stock shares that pay dividends at 5% of par. This option suggests that the purchase will enhance earnings after taxes next year due to the dividend income earned. Although this reasoning seems plausible, it does not account for other factors that may affect earnings. Therefore, option B cannot be definitively concluded from the given information alone.
C. ZYX Corporation’s purchase of preferred stock had no effect on the firm’s asset balance.
The given information does not provide any direct details about the effect of the preferred stock purchase on the firm's asset balance. Therefore, option C cannot be conclusively determined based on the information provided.
D. ZYX Corporation’s purchase of preferred stock improved its capacity to pay preferred stock dividends.
Since ZYX Corporation purchased preferred stock shares, it can be inferred that the purchase may have improved its capacity to pay preferred stock dividends. The acquisition of preferred stock can increase the availability of shares, allowing the corporation to distribute dividends to stockholders. Therefore, option D can be considered the best conclusion based on the provided information.
In conclusion, based solely on the given information, the best conclusion is option D: ZYX Corporation’s purchase of preferred stock improved its capacity to pay preferred stock dividends.