University Of Education, Bank Road Lahore.

Presented By:1. Saima Kausar (35) 2. Sameia Farhat (36)

Department:BBA (Hon’s) - 8th Semester

Preferred Stock And Common Stock

Preferred Stock and Its Features

A type of stock that promises a (usually) fixed dividend, but at the discretion of the board of directors, It has preference over common stock in the payment of dividends and claims on assets.

Cumulative Dividends Feature A requirement that all cumulative unpaid dividends on the

preferred stock be paid before a dividend may be paid on the common stock.

Participating Feature Preferred stock where the holder is allowed to participate in

increasing dividends if the common stockholders receive increasing dividends.

Voting Rights in Special Situations Preferred stockholders are not normally given a voice

in management unless the company is unable to pay preferred stock dividends during a specified period.

Any situation in which the company defaults under restrictions in the agreement may lead to voting power for preferred shareholders.

Preferred shareholders cannot force the immediate repayment of obligations.

Retirement of Preferred Stock Call Provision -- almost all issues carry a call price

which is above the original issuance price and may decrease over time.

Sinking Fund –Partially ensures the orderly retirement of the stock.

Conversion -- certain issues are convertible into common stock at the option of the preferred stockholder.

Use of Preferred Stock in Financing

The corporate issuer do not use preferred stocks as a

mean of long term financing because preferred dividend

is not tax deductible by the issuer.

The corporate investor is attracted to preferred stock as

generally 70% of dividends is not subject to taxation.

Money market preferred stock—Stock having a

dividend rate that is reset at auction every 49 days.

Continued…

Flexibility in paying dividends and an infinite maturity

(similar to a perpetual loan) are significant advantages to

the corporate issuer. Under dire circumstances company can omit its preferred

dividend.

P/E ratio=market price per share earning per share

Common Stock and Its Features Securities that represent the ultimate

ownership (and risk) position in a corporation.

Authorized shares Issued shares Outstanding shares Treasury stock

Par Value “Face Value of a stock or bond.” A recorded figure in the corporate charter and is of

little economic consequence. Not to be issued at Under Par (discount) (i) Contingent Liability for the company, (ii) In case of Liquidation, shareholders will

be legally liable to the creditors. Common stock that is authorized without par value is

carried on the books at the original market price or at some assigned (or stated) value.

Fawlty Pacemakers, Inc.

Common stock ($5 par value; 10,000 shares issued and outstanding) $ 50,000Additional paid-in capital 400,000Total shareholders’ equity $ 450,000

The par value of Fawlty Pacemakers, Inc., is $5 per share. But they are issuing at $45 per Share. This value is not likely to change over time from normal day-to-day operations.The difference between the issuing price and the par or stated value is additional paid-in capital.

Example:

Book Value (Per share)Book Value per Total Assets – (Liabilities – Issued share of Common = Preferred Stock)Stock No. of Shares Outstanding

Total Shareholder’s Equity= Total Assets – (Liabilities – Issued Preferred Stock)

Fawlty Pacemakers, Inc.

Common stock ($5 par value; 10,000 shares issued and outstanding) $ 50,000Additional paid-in capital 400,000Retained Earnings 80, 000Total shareholders’ equity $ 530,000

Book Value (per share) = 530,000/10,000 = $53

Liquidating Value (Per share)

“The value per share if the firm’s assets are sold separately from the operating organization.”

Assets are sold less than their Book Value when Liquidating Costs are involved.

For the company involved, this value may be greater than book value.

Market Value (Per Share)

“The current price at which the stock is being traded.” Market price quotations are readily available for

active stocks. For inactive stocks that have thin markets, prices

are difficult to obtain. Differs from book value and Liquidating value. Shares of new companies are traded in the over-

the-counter (OTC) market

Rights Of Common Shareholders

A. Right to Income: Entitled to share in the earnings of

the company only if cash dividends are paid.

May take legal action if the company fails to pay the contractual interest and principle payment.

B. Voting Rights Shareholders are owners of the firm, they are

entitled to elect the board of directors. Shareholders are generally geographically widely

dispersed. Two methods of voting: (1) in person or (2) by

proxy Proxy -- A legal document giving one person

authority to act for another.

Cont… SEC regulates the solicitation of proxies

and requires companies to disseminate information to their shareholders through proxy mailings.

Most shareholders, if satisfied with company performance, sign proxies in behalf of management.

C. Rights to Purchase New Shares (May Be)

The corporate charter of state statute may provide current shareholders with a preemptive right, which requires that these shareholders be first offered any new issue of common stock or an issue that can be converted into common stock.

Dual-Class Common Stock Two classes of common stock, usually

designated Class A and Class B. Class A is usually the weaker voting or nonvoting class, and Class B is usually the stronger.

This is used to retain control for founders, management, or some other specific group.

Cont… For example, 80,000 shares are issued to Class A

at $20/share and company raised $2 million from this. And 200,000 shares issued to Class B at $2/share; $1.6 million gained. Class A puts up 80% of the funds, but Class B has over 70% of the votes

Usually Class B takes a lower claim to dividends and assets than Class A for this voting control.