Please enable JavaScript.
Coggle requires JavaScript to display documents.
CH 5 PREFERRED STOCK (Features of PS (Par value - Represents the claim of…
CH 5 PREFERRED STOCK
Features of PS
- Par value - Represents the claim of the preferred stockholder against the value of the firm normally RM100
- Hierarchy of claims -In an issuing company's capital structure, investors have first claim to income & assets before common stock holders but after debt holders.
3, Dividend Payments - As a income security & dividend rate is expressed as a %of the par value of the preferred stock.
- Voting rights - Any situation in which the company defaults under restrictions in the agreement to may lead to voting power for the preferred shareholders.
- Non cumulative preferred stock - Does not have cumulative feature & dividend on such stock do not accumulate if they are not paid.
- Cumulative preferred stock - If the company fails to pay dividend to its cumulative preferred stockholders, it will have to pay all the missed dividends before the company can pay any dividends to its commons shareholders.
- Pre emptive rights - The holders have the tights to maintain their proportionate share of ownership
- Callable preferred stock - Is said to be callable or redeemable when the issuing company has a right to redeem the outstanding preferred shares .
- Partcipating preferred stock - This means the holders participate in the dividends of common stock and receive the additional dividend that declared by BOD.
- Convertible bond - Have the option to conver the PS into CS at a predetermined ration, this is attractive and the holder enjoy appreciation in value if the company common stock rises.
- Sinking Funds Provision - Requires the issuers to set aside some money for the retirement of its preferred stock
- Adjustable rate/ floating rate preferred stock - Some PS have adjustable rather than fixed rate of cash dividend payments
- Rating - Like bonds, PS are rated by the major credit rating companies
Issuing Preferred Stock
Advantages
- The company able to raise capital without sacrificing control
- The payment of dividend is not mandatory
- PS is not debt security, therefore ps are not in position to liquidate company if div not paid
- Issuing Ps will not dilute the outstanding common stock holder's position
- PS holder do not share the surplus earning with common stock holders unless they are participating stockholder
Disadvantage
- Tax deductibily - Stock holders are not qualified for tax deduction when compared to the interest of bonds
- Seniority of claimants - PS has first claim over CS holders in terms of earnings in the form of dividends & assets in case of liquidataion
- The cost of PS financing generally higher than debt of financing
- A company financed with PS is obligated to pay its shareholders a fixed & regular dividend
-
-