Chapter 1, Day 3 Flashcards
What is the par value of preferred stock and why is it important?
The par value, typically $100 unless stated otherwise, is used to calculate dividend payments. Preferred dividends are expressed as a percentage of par value.
How do you calculate annual income from preferred stock based on par value?
Multiply the par value by the dividend rate, then multiply by the number of shares.
Example: 100 shares of 9% preferred → $100 × 9% × 100 = $900
Who gets paid first — preferred or common shareholders?
Preferred shareholders receive dividends before common shareholders, giving them a priority claim on earnings.
In case of liquidation, who has the superior claim on corporate assets?
Preferred shareholders have a higher claim than common shareholders in the event of liquidation or bankruptcy.
What does it mean that preferred stock is perpetual?
It has no maturity date. Investors can hold it indefinitely unless it is called by the company.
Do preferred shareholders usually have voting rights?
No, most preferred shares are nonvoting. However, cumulative preferred holders may gain voting rights if dividends go unpaid for several periods.
Why are preferred shares sensitive to interest rates?
Because they generate fixed income, preferred shares have an inverse relationship with interest rates — as rates rise, preferred prices fall.
What is the difference between straight (noncumulative) and cumulative preferred stock?
Straight preferred pays only the stated dividend and does not accumulate missed payments. Cumulative preferred accumulates missed dividends (in arrears) and must be paid before common dividends.
What does it mean when dividends are “in arrears”?
These are unpaid cumulative preferred dividends that must be paid before any common shareholder dividends are distributed.
How much is owed to a holder of 8% cumulative preferred if four years of dividends were missed?
4 × 8% × $100 = $32 per share.
What is participating preferred stock?
It allows holders to receive their stated dividend plus additional dividends if common shareholders receive a certain amount.
What is convertible preferred stock and how is conversion calculated?
It allows shareholders to convert preferred shares into common stock at a set price.
Example: $100 par ÷ $20 conversion price = 5 shares
What is callable preferred stock and who benefits from the call feature?
It allows the company to repurchase shares, often at a premium. This benefits the issuer, not the investor.
What is “call protection”?
A period during which callable preferred stock cannot be redeemed by the issuer — gives temporary security to investors.
What are the key dates in the dividend distribution process?
Declaration date: Board announces the dividend.
Ex-dividend date: First day stock trades without the dividend (1 day before record date).
Record date: Investors must be on the books to receive the dividend.
Payment date: Dividend is actually paid to shareholders.
