preferred share
- 2. Topic Layout • Stock • Types of stocks • Dividend • Features of Preferred Stocks – Cumulative Dividend Feature – Participating Feature – Voting Rights – Retirement of Bonds • Call Provision • Sinking Fund • Conversion
- 3. What is stock the capital raised by a company or corporation through the issue and subscription of shares.
- 4. Common stock Preferred stock Stock
- 5. Common stock Represents ownership in a corporation. Have the right to vote. Get share in profit through dividends.
- 6. Dividend A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Can be issued as cash payments, as shares of stock, or other property.
- 7. Basic Terms - Preferred Stocks Preferred Stocks − Preferred stock is a hybrid form of financing, combining feature of debt and common stock. − Like bonds, preferred stock has a par value and a dividend, that must be paid before dividends can be paid on the common stock. − However, if the preferred dividend is not earned, the directors can omit it without throwing the company into bankruptcy.
- 8. Basic Terms - Preferred Stocks Dividend − The dividend paid on preferred stocks are fixed, in terms of the rate at which it is paid. − Holders of the preferred stocks must receive a dividend (in the case of an ongoing firm) before holders of common shares are entitled to anything. − Although preferred stock has a fixed payment like bonds, which is at the discretion of the board of directors and a failure to make this payment will not lead to bankruptcy
- 9. Basic Terms - Preferred Stocks Par Value − Preferred shares have a stated par value. − In case of liquidation the claim of preferred stock holders is restricted to the par value of the preferred stock. − The claim of preferred stockholder’s on assets comes after that of creditors but before that of common stockholders.
- 10. Features of Preferred Stocks Cumulative Dividend Feature − A requirement that all cumulative unpaid dividends on the preferred stock be paid before a dividend may be paid on the common stock. − For example, if the board of directors omits a $6 preferred dividend for two years, it must pay preferred shareholders $12 per share ($100 par value) before any dividend can be paid to common shareholders. − The corporation does not have to make up the dividend even if it is profitable, as long as the firm has no plans to pay dividends to common shareholders.
- 11. Features of Preferred Stocks Participating Feature − Preferred stock where the holder is allowed to participate in increasing dividends if the common stockholders receive increasing dividends. − Preferred stockholders have a prior claim on income and an opportunity for additional return if the dividends to common stockholders exceed a certain amount.
- 12. Features of Preferred Stocks Voting Rights − Preferred stockholders are not normally given a voice in management unless the company is unable to pay preferred stock dividends during a specified period. − If such a situation presents itself, the class of preferred stockholders would be entitled to elect a specified number of directors. − Any situation in which the company defaults under restrictions in the agreement (similar to bond indenture) may lead to voting power for preferred shareholders. − Preferred shareholders cannot force the immediate repayment of obligations (like debt obligations).
- 13. Features of Preferred Stocks Retirement of Preferred Stocks ◦ Call Provision -- almost all issues carry a call provision because of the infinite maturity. It is often a cheaper method of retirement than open market purchases, inviting tenders, or an exchange of securities. ◦ Sinking Fund -- like bonds, many preferred issues provide for this method of retirement. ◦ Conversion -- certain issues are convertible into common stock at the option of the preferred stockholder. Used most frequently in the acquisition of other companies.
- 14. Use in Financing • The corporate issuer uses irregularly because the preferred dividend is not tax deductible. • The corporate investor is attracted to preferred stock as generally 70% of dividends can be excluded from taxes. • Flexibility in paying dividends and an infinite maturity (similar to a perpetual loan) are significant advantages to the corporate issuer. • The after-tax cost of preferred financing is greater than that of long-term debt financing to the corporate issuer.
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