BU111 Study Guide - Final Guide: Preferred Stock

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Published on 16 Oct 2011
School
Department
Course
L5 BU111 12/10/2011
Alternate Types of Investment
Preferred Shares
Hybrid Financing
oHas some features very similar to a bond and some features that make it
similar to common stock
Characteristics of All Preferred Shares
Pay Fixed Annual Rate of Dividend
oFixed rate much like a bond
oDividend return much like common stock
oFace value of preferred stock varies (100$ is common)
oThe amount of dividend is determined either:
i. % of face value (ABC 8% Preferred8% x given face value)
ii. Media: BCE.Pr.Q.1.73
Purely discretionary (if they had a bad year, they will not pay, not required like
bonds)
No date of final maturity
oPerpetual financing
Sell in secondary market (like common stock), can’t sell back to
company (like a bond)
Non voting shares
oThough you become a part owner, you don’t have the right to vote
oVoting rights traded for preference rights
Preference rights vs. common shares
oDividends
Preferred stock holders get first claim of money, before common
stock
oLiquidation rights
Liquidation claims must be paid to preferred stock before common
Preferred stock prices vary inversely with interest rate movements in the economy
oFor the same reason bond prices behave in this manner
Features of Some Preferred Shares
Cumulative Feature:
oIf dividends are not declared in a given year, they carry over to the next
year
Issuer
Preferred
stock
Issue
Dividend Amnt.
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Document Summary

Hybrid financing: has some features very similar to a bond and some features that make it similar to common stock. Purely discretionary (if they had a bad year, they will not pay, not required like bonds) No date of final maturity: perpetual financing. Sell in secondary market (like common stock), can"t sell back to company (like a bond) Non voting shares: though you become a part owner, you don"t have the right to vote, voting rights traded for preference rights, dividends. Preferred stock holders get first claim of money, before common stock: liquidation rights. Liquidation claims must be paid to preferred stock before common. Preferred stock prices vary inversely with interest rate movements in the economy: for the same reason bond prices behave in this manner. Cumulative feature: if dividends are not declared in a given year, they carry over to the next year.

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