MGAB01H3 Lecture : Preferred Shares

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10 Nov 2010
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MGAB01H3 Full Course Notes
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Preferred shares have contractual provisions that give them a preference, or priority, over common shares in certain areas. Typically preferred shares have priority over dividends, and assets in the event of liquidation. Like common shares, preferred shares may be issued for cash or for noncash assets. Dividend preference: corporate income is distributed to preferred shareholders before it goes to common shareholders. The first claim to dividends does not, however, guarantee the payment of dividends. Cumulative dividend: means that preferred shareholders must be paid both current year dividends and any unpaid prior year dividends before common shareholders receive dividends. When preferred shares are cumulative, preferred dividends that are not declared in a given period are called dividends in arrears. Dividends in arrears are not considered a liability. No payment obligation exists until a dividend is declared by the board of directors. Convertible preferred: shares give shareholders the option of exchanging preferred shares for common shares at a specified ratio.

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