Series 7 Chapter 1 Preferred Stock

why would a company call in stock?

An issuer will usually choose to call in the stock if interest rates drop and the issuer can issue new preferred stock at a lower rate

what do these veto rights extend to regarding protective provisions

Any sale or dissolution of the company • The issue of new shares of stock • The issue of new debt beyond some stated amount • A change to the certificate of incorporation or bylaws • Changes to any rights of other shares that give better rights than their preferred shares 50% or more greater vote

why preferred?

Preferred stock is "preferred" in the sense that dividend payments are distributed to preferred stockholders before any dividends are paid to common stockholders. Preferred stock also has a higher claim on a corporation's dividends and residual assets during bankruptcy than common stock If a company is forced to liquidate, preferred stockholders have first claim to its remaining assets compared to other equity holders. The price for these enhanced privileges is that preferred stocks generally come without voting rights and have no real share in the company's profits

cumulative preferred stock

allows dividends to accumulate when a payment is not made.

participating preferred stock

allows investors to receive extra dividends when the company exceeds some predetermined financial goals; Participating preferred also often receives a greater claim during liquidation than non-participating preferred

convertible preferred stock

allows shareholders to participate in the growth of a company. These investors have the right to convert their preferred shares to common stock at a set conversion ratio; dependent on price of stock instead of interest rates

Non-cumulative preferred stock

does not accrue unpaid dividends. Few companies issue shares of non-cumulative preferred, since they are unattractive to investors, but terms may sometimes be added to improve their value, such as fixing the number of allowable missed payments or automatically granting voting rights when a payment is missed. Non-cumulative will typically offer higher dividends than cumulative preferred stock.

term preferred stock

in which it will repay the par value of the stock in cash or in common shares at a set maturity date of, say, 10 years

what will change the price of a preferred stock

interest rates rather than the change in company earnings

fixed rate preferred stock

may set its dividend payment at a fixed-dollar value ($5), or the dividend may be based on a percentage of the par value of the stock as stated on the stock certificate (5%)

tax on individual investors

must pay taxes on the full dividend received though usually at the 15% qualified dividends rate, ordinary income tax depending on holding period

transfer of preferred stock

trade in secondary market

floating rate

will have an adjustable dividend based on a formula tied to another benchmark, such as 3% above the interest rate on 90-day Treasury bills. The rate is reset quarterly, making the prices of adjustable-rate preferred less sensitive to interest rate changes than fixed-rate preferred. usually pays lower dividends

interest rates and preferred stock

preferred stock appreciates with falling interest rates, vice versa

XYZ issues preferred stock with a 10% annual dividend. The par value on the preferred stock is $100 per share. The share price of the preferred stock is $110, and the share price of the common stock is $200. What is the quarterly per-share dividend on the preferred stock?

$2.50

Ruby Red Jewelry has issued both common stock and cumulative preferred stock. The cumulative preferred stock pays an 8% annual dividend on stock with a $100 par value. Ruby Red Jewelry has not paid a common or preferred dividend for two quarters. It has committed to pay a $2 per share dividend to its common stockholders. How much will it be required to pay its preferred shareholders per share?

$6

A $100 convertible preferred stock certificate is issued in March 2011. The stock pays 4% in dividends and is convertible at $20. The price of the company's common stock at issue was $10.27 per share. On the conversion date of March 15, 2015, the common stock is at $13.10 per share. What is the conversion parity price for the preferred share, if the shareholder converts on the conversion date?

$65.50

how much tax deduction does a corporation receive on preferred dividends

70%

preferred dividends

As with common stocks, dividend payments for preferred shares often are paid quarterly. Unlike with common stocks, however, dividend payments for preferred shares are determined when the stock is issued

face value

Most preferred stock is issued with a par value of $25, $50, or $100. While $25 is the most common par value, on the Series 7 exam, you are likely to see questions with a par value of $100 to make calculations easier.

protective provisions

feature of preferred stocks, written into a company's certificate of incorporation. protective provisions permit preferred shareholders to veto certain actions by the company, such as a sales/merger of the company and raising of capital

when do companies issue preferred stock

when the sale of bonds or common stock is not feasible M&A may issue preferred stock to use in exchange for the other company's assets so as not to dilute it's own voting control unstable earnings may issue preferred stock company wishing to maintain liquidity market demand

how is callable preferred stock usually redeemed?

Callable preferred shares are usually redeemed at a premium to par. For example, if the shares have a par value of $100, the investor may receive $110 to redeem the shares, higher dividends usually

callable preferred stock

Callable preferred stock gives the issuing company the right to call in its shares after some set date at a set price

Preferred Stock

Like a debt security, preferred shares generate income from a fixed, regular monetary payment rather than a share in the company's financial gains. Also like a bond, a preferred stock's market price fluctuates with interest rates and credit worthiness, rather than with a company's earnings and losses. As a result, preferred stock is less risky than common stock, but it offers less growth potential. It is more risky than debt, because companies can miss their regular dividend payments without being in default.

liquidation

receive preference over common stockholders if the company goes bankrupt

par value

represents the claim of the preferred shareholder against the value of the firm during liquidatio. if company goes bankrupt, amount of money that the preferred shareholder can claim do not receive the par value at maturity

sinking fund provision

requiring the corporation to set aside funds for the orderly eventual redemption of its outstanding securities. A sinking fund provision often requires that a fixed number of securities be retired each year. Default in providing the sinking fund may result in penalties, but it is not as serious as defaulting on a loan. Typical penalties might prevent a company from using cash to pay common stock dividends or to repurchase its stock