Preferred Stock

ABC 8% $100 par preferred is trading at $120 in the market. The current yield is: A 6.7% B 8.6% C 10.6% D 60.6%

A. The formula for current yield is: annual income / market place $8 / $120= 6.7%

Dividends on preferred stock may be paid in: A Cash. B Common shares of the same issuer C Common shares of another issuer D Preferred stock of the same issuer

A. Dividends on preferred stock are paid solely in cash. Dividends on common stock may be paid in cash; stock; stock of another company (such as shares of a subsidiary company) or products of that company.

POP Company has issued 11%, $100 par cumulative preferred stock. Two years ago, POP paid a preferred dividend of $9. Last year, it paid a preferred dividend of $11 per share. This year, POP wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A $13 B $15 C $20 D $22

A. Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be made). The stated dividend rate on the preferred is 11% based on $100 par. Two years ago, 9% was paid, so there is a 2% dividend due. Last year, the corporation paid 11%, so there is nothing additional due. Also, this year's dividend of 11% must be paid. The total dividend that must be paid is 13% or $13 per preferred share before a common dividend can be paid.

ABC 8% $100 par preferred is trading at $105 in the market. The current yield is:. A 6.6% B 7.6% C 8.6% D 10.6%

B. The formula for current yield is: annual income / market price $8/$105= 7.6%

A customer holds 100 shares of ABC Corp $100 par convertible preferred stock convertible at a 10 to 1 ratio. If ABC declares and pays a 10% stock dividend, then as of the payable date, the customer will now have: A 90 shares of ABC preferred stock B 100 shares of ABC preferred stock C 100 shares of ABC preferred stock and 10 shares of ABC common stock. D 110 shares of ABC preferred stock

B. If ABC declares and pays a 10% "common" stock dividend, the customer who holds convertible preferred stock still would have 100 shares. However, the conversion ratio which was initially 10 to 1 would reflect the stock dividend and would get adjusted to an 11 to 1 ratio (10% additional common shares into which the preferred is convertible). With a new conversion ratio of 11 to 1, the conversion price per share becomes: $100 par / 11 shares = $9.09 per share.

Callable preferred stock is likely to be redeemed by the issuer if: A interest ratesrise B interest rates fall C the common stock price rises D the common stock price falls

B. If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.

A customer buys 100 shares of preferred at $80 per share. The par value is $100. The dividend rate is 10%. The customer will receive how much in each dividend payment? A $400 B $500 C $800 D $1,000

B. Preferred dividends are based on a stated percentage of par value. The stated rate is 10% of $100 par = $10 annual dividend per preferred share. Since there are 100 shares, the annual dividend is $1,000. Remember, though, that preferred dividends are paid twice a year, so each payment will be for $500.

A customer buys 100 shares of preferred at $101 per share. The par value is $100. The dividend rate is 8%. Each dividend payment will be: A $80 B $400 C $800 D $808

B. The annual rate is 8% x $100 par value = $8 per share x the number of shares = $800. Since preferred dividends are paid semi-annually, each payment would be $400.

Which statement is TRUE when comparing convertible preferred stock and non-convertible preferred stock? A Convertible preferred stock will have a higher yield than non-convertible preferred stock B Convertible preferred stock will have the same yield as non-convertible preferred stock from a given issuer C Convertible preferred stockholders benefit as the market price of the common stock rises D Convertible preferred stockholders benefit as the market price of the common stock falls

C. Convertible preferred holders benefit if the stock rises above the issues conversion price since they would have the opportunity to buy common stock below market. Non-convertible preferred yields are higher than convertible yields. A non-convertible preferred stockholder gets a fixed rate of return without any growth potential. A convertible preferred stockholder can convert to common if the common's price rises, so growth potential is included. Because of this, yields for convertible preferred are lower than for non-convertible preferred.

If interest rates fall, issuers most likely will call: A all preferred issue B preferred issues with below market interest rates C preferred issues with above market interest rates D only preferred issues with high call premiums

C. If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. The "call premium" is any amount that the issuer will pay the preferred stockholder above par value as "extra" compensation for calling in the issue. Issuers are more likely to call in issues with low call premiums (lower extra cost to the issuer) than call in issues with high call premiums (higher extra cost to the issuer).

Which statement is TRUE when comparing convertible preferred stock and non-convertible preferred stock? A Convertible preferred shares will have a higher yield than similar non-convertible shares of the same issuer B Non-convertible preferred shares and convertible shares of the same issuer typically have the same yield C Non-convertible preferred shares will have a higher yield than similar convertible shares of the same issuer D Non-convertible preferred stockholders will benefit as the common stock price rises

C. Non-convertible preferred yields are higher than convertible yields. A non-convertible preferred stockholder gets a fixed rate of return without any growth potential. A convertible preferred stockholder can convert to common if the common's price rises, so growth potential is included. Because of this, yields for convertible preferred are lower than for non-convertible preferred.

Which statement is TRUE regarding participating preferred stock? Participating preferred: A participates in any bond interest payments B participates in a portion of the price appreciation of the issuer's common stock C has a dividend rate that is fixed as to a minimum but not as to a maximum D has a dividend rate that is fixed as to a maximum but not as to a minimum

C. Participating preferred pays a fixed dividend rate but also participates with common in "extra" dividends declared by the Board of Directors. Therefore, the dividend is fixed as to the minimum amount but not as to the maximum amount.

All of the following statements are true about preferred stock EXCEPT:. A Preferred dividends are paid before common B In most cases dividends are paid semi-annually C Corporations must pay preferred dividends D Preferred shareholders are paid before common shareholders upon liquidation of a corporation

C. Preferred stock has preference over common as to the payments of dividends and as to assets upon liquidation. Preferred dividends are, in most cases, paid semi-annually. The Corporation will only pay the preferred dividend if the Board of Directors decides. There is no legal obligation to pay the preferred, however, if it is not paid, investors will not find the stock attractive and won't invest in it.

Preferred stock has all of the following features EXCEPT: A Fixed rate of return B Priority claim to assets upon dissolution compared to common stock C Priority claim to dividends declared compared to common stock D Voting rights

D. Preferred stock lacks voting rights - remember that it is a fixed income security that is very "bond-like." Preferred has a fixed rate of return (the dividend rate), has priority claim to assets upon dissolution over common, and has priority claim to dividends over common, if declared by the Board of Directors. Preferred stock does not have a fixed maturity date - it has an indefinite life.

Which statement is TRUE about preferred stock? A Wheninterest ratesrise, preferred stock prices rise B When interest rates fall preferred stock prices fall C Preferred stock is unaffected by interest rate swings D When interest rates rise, preferred stock prices fall

D. Preferred stock is a fixed income security, and hence, when market interest rates move, the only way for the yield on the security to adjust to the market is to have the price change. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security.

All of the following are terms associated with preferred stock EXCEPT? A Convertible B Callable C Cumulative D Redeemable

D. Preferred stock is not a redeemable security - it is a negotiable security. The stock cannot be redeemed with the issuer - an investor who wishes to liquidate must sell the stock in the market. Preferred stock can be callable, cumulative, and convertible.

ABC Company has issued 10% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 7% preferred dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive: A 0% B 7% C 10% D 17%

D. Since this is cumulative preferred stock, all missed dividends must be paid before a common dividend can be paid. Two years ago, 4% was missed; last year 3% was missed; and this year's preferred dividend of 10% must be paid before the common dividend is paid. The total preferred dividend to be paid is 17%.