Preferred and Common Stock

common stock expected return =

(Dividend in year 1/market price) + dividend growth rate

Multiple Classes of Preferred stock: 1. Class ___ and Class ___ 2. If a company desires, it can issue more than one series or class of preferred stock, and each class can have different characteristics

1. A and B

Features of Characteristics of Common Stock (4):

1. Claim on Assets 2. Voting Rights 3. Preemptive Rights 4. Limited Liability

Valuing of Common Stock (2 methods) 1. _________ _________ of all future dividends 2. _________ ________ method

1. Present Value of all future dividends 2. Free Cash Flow Method

Preferred Stock Claim on Assets: 1. Preferred stock has "priority" over common stock with regard to claims on assets in the case of _______________. 2. A preferred stock claim is honored after ______ and before ____________ 3. The firm must pay ________________ dividends before it pays ______________ dividends

1. bankruptcy 2. bonds; common stock 3. preferred stock; common stock

Similar (preferred) common stock characteristics: 1. No _______ maturity date 2. Failure to pay dividends does not bring on ________ 3. Dividends are not __________

1. fixed 2. bankruptcy 3. deductible

2 types of stock:

1. preferred 2. common

Valuing Preferred Stock: 1. The value of preferred stock is the ________ value of all _______ dividends 2. Preferred stock = ___________/____________ 3. preferred stock dividend payment is a _____________, goes on forever

1. present, future 2. annual dividend/annual rate of return 3. perpetuity

preferred stock expected return =

Annual dividend/market price

Dividend Valuation Method: 1. Common Stock Value = __________ in year 1/( ______ - _______ )

Dividend in year 1/ROR - Growth rate

Free Cash Flow Method: 1. Shareholder value = _________ - ________/ _____________

Firm Value - Debt/Number of shares outstanding

Retirement features: 1. ________ _______: most preferred stock has some type of "call" provision--entitles a company to repurchase its preferred stock (or bonds) from their holder at stated prices over a given period

callable preferred

______________: the common shareholder have the right to the residual income after bondholders (and other creditors) and preferred stockholders have been paid

claim on assets

_________________ stock: certificate that indicates ownership in a corporation; __________ stockholders are the "true" owners of the firm

common stock

the _____________ on a security is the required rate of return of investors who are willing to pay the market price for the security

expected rate of return

Similar (preferred) Bond Characteristics: 1. Interest is limited or _______ as either a percentage of par value or specific dollar amount

fixed

preferred stock: 1. __________ security: characteristics of both common stocks and bonds

hybrid

_____________ liability: the common shareholder's liability in the case of bankruptcy is limited to the amount of their investment

limited liability

___________ voting: each share of stock allows the shareholder one vote, and each position on the board is voted on separately

majority

Preferred stock dividend payment is a ___________, goes on forever. The present value of a ___________ is the annuity discounted by reqd. rate of return; (Annuity/ROR)

perpetuity

_______________ rights: entitles the common shareholder to maintain a proportionate share of ownership in the firm

preemptive rights

___________ __________: allow for voting rights in the event of nonpayment of dividends or then can restrict the payment of common stock dividends if sinking fund payments are not met or if the firm is in financial difficulty

protective provisions

_______________ rights: the common shareholders are entitled to elect the board of directors and are in general the only security holders given a vote.

voting rights

____________ dividends: requires all past, unpaid dividends to be paid before an common stock dividends are declared

cumulative

_______________: at the discretion of the holder, the stock can be converted into a predetermined number of shares of common stock. Most of all preferred stock issued today a have a ______________ feature

convertibility

____________ voting: each share of stock allows the stockholder a number of votes equal to the number of directors being elected. The shareholder may cast all votes for a single candidate or split them among the various candidates

cumulative

Retirement features: 1. _______ ______ ______: requires the from periodically to set aside an amount of money for the retirement of its preferred stock

sinking fund provision