Preferred Stock

Company Accounting

Outline Definition Rights Characteristics of Preferred Stock Types Preferred Stock The following attributes of preferred stocks

should be recognized How Do I Buy Preferred Stock? Preferred Stock Valuation Risks of investing in preferred stocks

Preferred Stock Another way for a company to raise

capital for its growth

It pays the preferred stockholder a fixed, agreed-upon dividend at regular intervals.

Anyone can purchase preferred stock and it can often be converted into common stock at a later stage

8. Prior Preferred, First Claim Preferred, or Senior Preferred Stock

9. Auction-Rate and Stated Rate Auction Preferred Stocks (STRAPS)

10. Remarketed Preferred Stock11. Fixed Rate Capital Securities (FRCS)

Rights1. The payment of dividends and upon

liquidation of the company .

2. The dividend rights are often cumulative, such that if the dividend is not paid it accumulates from year to year.

3. Preferred stock has a claim on liquidation proceeds of a stock corporation.

4. Almost all preferred shares have a negotiated fixed dividend amount.

5. Almost all preferred shares have a negotiated fixed dividend amount.

6. Some preferred shares have special voting rights to approve certain extraordinary events

7. Usually preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim.

8. use preferred shares as means of preventing hostile takeovers,

Characteristics of Preferred Stock

1. Preference as to the payment of dividends .

2. Assets - in the even of liquidation.

3. Convertibility.

4. Non-voting.

5. Callable.

Types Preferred Stock

1. Perpetual Preferred Stock (Perpetuity)

2. Adjustable Rate Preferred Stock3. Cumulative Preferred Stock4. Convertible Preferred Stock

5. Callable Preferred Stock6. Preferred Equity Redemption

Cumulative Stock (PERCS)7. Participating Preferred Stock

The following attributes of preferred stocks should be recognized

A preferred stock may be likened to a bond with an infinite maturity .

Insofar as safety is concerned, all the preferred stocks of a company rank behind all of that company's bonds.

Assuming that the preferred stock is sound, the primary determinant of its price is the level of interest rates

If a preferred stock (or a bond) is callable, it is even less desirable.

How Do I Buy Preferred Stock?

1. Learn what the differences are between preferred stock and common stock.

2. Understand the advantages when you buy preferred stock.

3. 4. Be aware of the disadvantages of preferred

stock.

5. Open a brokerage account.

6. Research a company thoroughly before you purchase preferred stock

Preferred Stock Valuation Preferred stock has the following

features:

1. Par Value2. Preferred Dividend / Preferred

Dividend Rate preferred dividend rate annual preferred dividend

the following equation:

Preferred Stock Valuation Example

Find the price of a share of preferred stock given that the par value is $100 per share, the preferred dividend rate is 8%, and the required return is 10%.

Solution:

Risks of investing in preferred stocks 1. Preferred stocks can default.2. Some preferred stocks come with a

call or mandatory conversion feature. 3. In general, preferred stocks have

lower liquidity than common stocks. 4. Preferred stocks are often rated by

ratings agencies and may drop in price if their ratings are reduced.

5. Historically, preferred stocks have generally shown little price appreciation potential.

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