2.5 Preferred Stock Flashcards
preferred stock
The intrinsic value of preferred stock can be determined by taking the annual dividend amount and dividing by the investor’s required rate of return.
Preferred stocks pay a fixed dividend.
Preferred stock dividends are paid quarterly.
Preferred stock’s value is based on prevailing interest rates.
Its market fluctuations are greater than the long-term bond market fluctuations.
It is more risky than debt.
Preferred stock is known as a hybrid security because it resembles both a fixed-income security and an equity instrument.
A company’s preferred stock may be cumulative where all unpaid dividends must be paid to the preferred shareholders before dividends can be paid to common shareholders.
characteristics of bonds and preferred stocks
Corporations pay taxes on preferred stock dividends prior to distribution to preferred shareholders, whereas interest on bonds is a deductible expense.
Bonds pay interest while preferred stocks pay dividends.
In the event of a company’s bankruptcy, bondholders would be paid first ahead of preferred stock shareholders
with respect to convertible bonds and convertible preferred stock if the value of the common stock rises
The value of convertible bonds and convertible preferred stock rises.
Convertible preferred stock has all of the following advantages
Preferred shares have less risk than common shares because the dividend is stable and they have priority over common stock in receiving dividends and in the event of liquidation of the firm.
If the firm is profitable, the investor can share in the profits by converting the shares into common stock.
The conversion option becomes more valuable when the common stock price increases.
differences between corporate preferred stock and long-term bonds?
Bonds represent a creditor position; preferred stock represents an equity position.
Bonds usually are not rated; preferred stock usually is rated.
