FIN 3014 Preferred Stock

- Cost is higher than debt. - Dividends are not tax-deductible.

2 Disadvantages of Preferred Stock to the Company

- Relatively steady income (relative to common stock). - Preference over common stock in liquidation. - Dividends paid to corporations owning the preferred stock are excluded from income to as much as a 70% extent.

3 advantages of preferred stock to the investor

- Returns are limited. - no enforceable right to dividends (unlike interest payments that must be paid annually). - high risk due to price fluctuations

3 disadvantages of preferred stock to the investor

- no fixed charge that must be paid each year. - no maturity. - No dilution of control (unless convertible). - The cost is less than the cost of common equity. While the first two advantages are the same as the advantage of using common stock, the cost is less. Why? Because the risk to the investor is less than that of common stockholders

4 Advantages of Preferred Stock to the Company

they can convert to common stock and cash

If the company does good, what can they do with stock?

convertible

The investors, typically venture capitalists, will invest money in the form of ___________ preferred stock

to raise additional capital

Why will you often see preferred stock used in small companies?

common equity

from the perspective of a bondholder, preferred stock is like _______ _________.

debt

from the perspective of a common stockholder, preferred stock is ______.

the investor is first in line to get paid dividends or to be repaid from any proceeds that remain after liquidation

if the company fails, what happens?

liquidation

in the event of ___________, preferred shareholders will be repaid the par value of the preferred stock.

interest rate

it is not uncommon that dividends in arrears also carry an ________ ________ that accumulates

hybrid, equity

preferred stock is a _______ instrument; it is like a debt, but it is also like _________.

- vote - sinking fund - common shares

provisions that may be included in a preferred stock issue: - Sometimes the preferred stockholder gets to ______. - There may be a maturity date and _____ _____ provision. - Sometimes there is a call provision. - On rare occasion, there is what is known as participating preferred stock that participates in the profits up to a limit during unusually good years. - Very often the preferred stock is convertible into ________ _______. Many times the ability to vote is linked to the conversion feature and the preferred stockholders can vote "as if" they had converted into common stock.

plain vanilla

since the ____________ type of preferred stock is a perpetuity, its value is very sensitive to changes in interest rates

classic

the _________ version of preferred stock is a share that pays a fixed dollar amount of dividend and never matures.

dividend preference

the company cannot pay any common stock dividends until the preferred stock dividends have been paid.

percentage of par value

the dividends on preferred stock are generally set a specific dollar amount per share, often expressed as a ___________ of ______ _____.