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