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Chapter 10 Appendix The Special Case of Preferred Stock

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Title: Chapter 10 Appendix The Special Case of Preferred Stock


1
Chapter 10 AppendixThe Special Case of
Preferred Stock
2
Introduction
  • Preferred stock is an equity security
  • Preferred stock is classified as a fixed-income
    security from an investment perspective
  • Utility companies are common issuers of preferred
    stock

3
Introduction (contd)
  • Characteristics of preferred stock
  • Pay higher dividends than common stock
  • Preferred shareholders have priority over common
    shareholders in the event of corporate
    liquidation
  • Preferred shareholders must receive their
    dividends before common shareholders receive
    anything

4
Introduction (contd)
  • Characteristics of preferred stock (contd)
  • Most preferred stock receives a set annual
    dividend
  • Preferred stock normally provides no growth of
    income and no price appreciation
  • The value of preferred stock is influenced by
    interest rate movements

5
Introduction (contd)
  • Characteristics of preferred stock (contd)
  • A corporation that owns less than 20 in a
    corporation can deduct 70 of the dividends
    received

6
Types of Preferred Stock
  • Straight preferred stock
  • Convertible preferred stock
  • Participating preferred stock
  • Cumulative preferred stock

7
Straight Preferred Stock
  • Straight preferred stock pays a fixed annual
    dividend in perpetuity
  • Straight preferred stock is the simplest type of
    preferred stock

8
Convertible Preferred Stock
  • Convertible preferred stock is like straight
    preferred stock
  • Additionally, the owner has the option to
    exchange the shares for a set number of common
    stock or some other security

9
Participating Preferred Stock
  • Participating preferred stock issues have the
    provision that shareholders may receive
    additional dividends in very profitable years
  • Participating preferred stock is less susceptible
    to interest rate risk than straight preferred
    stock

10
Cumulative Preferred Stock
  • Cumulative preferred stock accrues any missed
    dividend amounts
  • The firm must pay past dividends before paying
    any common dividends
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