Preferred Stock

Convertible Preferred

The preferred shareholder can "convert" his shares into the common stock of the issuer based on a predetermined price

Preferred stock features

Cumulative Callable Convertible Participating Adjustable rate

Dividends on preferred stock may be paid in:

Dividends on preferred stock are paid solely in cash

A corporation has issued $100 par, 8% cumulative convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $102 while the common stock is trading at $75.50. The corporation calls the preferred stock at par plus accrued dividends of $2 per share. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit is (ignoring commissions):

If the customer buys 100 shares of the preferred stock, he will pay 100 x $102 per share = $10,200. Since each share of preferred is convertible into 1.4 common shares, the 100 preferred shares will be converted into 1.4 x 100 = 140 common shares. The sale of 140 common shares at the current market price of $75.50 will yield $10,570. The net profit is: $10,570 - $10,200 = $370.

Cumulative Preferred

If the issuer omits dividend payments, they "accumulate" and are paid if the issuer can ever resume making dividend payments

Participating Preferred

In addition to the fixed dividend rate, the preferred "participates" in any "extra" dividends declared by the Board of Directors

A customer buys 100 shares of preferred at $51 per share. The par value is $50. The dividend rate is 8%. Each dividend payment would be:

The annual rate is 8% X $50 par value = $4 per share X 100 shares = $400. Since preferred dividends are paid semi-annually, each payment is for $200.

A corporation issues $50 par convertible preferred stock, convertible at $10 per share, when the market price of the common is currently $5. Which statement is true?

The conversion ratio is 5:1

Callable Preferred

The issuer has the right to "call in" the shares after a set date, usually at par.

The definition of Treasury Stock is

issued stock minus outstanding stock

Preferred stock

termed a "senior" security because it has priority over the common stock issued by the company