chapter 8 part 2

Question 1

how are dividends calculated with preffered stocks?

Answer 1

Usually a fixed dividend on a agreed upon par value. ex par value of 50$ with interest of 5% the dividend would be 2.5$

Question 2

explain how preffered shares are fixed income securities?

Answer 2

Because they have a fixed dividend. and if interest rates decline preffered share prices go up like a bond

Question 3

What are the benefits of preffered shares vs debt issues?

Answer 3

a preffered share does not have a maturity date although it can have a purchase fund. and dividends can be omitted if funds are not available.

Question 4

what are 5 reasons a company will issue preffered shares over debt issues?

Answer 4

1. if it is not feasible to issue new debt
2. Market conditions are currently unreceptive to new debt issues
3. to balance debt/equity ratio
4. to avoid legal obligations of paying interest and principle
5. directors decide paying dividend will not be expensive

Question 5

why issue preffered shares over common?

Answer 5

if the markets are down or inactive. a company can issue preffered shares as they do not lower equity of a company like common shares would

Question 6

why do investors buy preffered shares?

Answer 6

Usually income-orientated investors wanting low risk.

also companies invest and other companies for a income investment

Question 7

what is the difference between cumulative and non-cumulative?

Answer 7

cumulative if the company votes to not pay dividends the pile-up in whats called arrears.
non-cumulative is entitled to a specific dividend in a year only when declared and there is no arrears

Question 8

what are 7 possible features of preffered shares?

Answer 8

1. Cumulative
2. non-cumulative
3. callable
4. non-callable
5. voting privileges - normally no voting privileges but if dividends omitted for a specified number of times can gain voting rights
6. Purchase fund
7. Sinking fund

Question 9

what is a straight preffered?

Answer 9

has a fixed dividend and any features of a preffered. the value and dividend are tied to interest rates

Question 10

what is a common preffered?

Answer 10

preffered that can be converted into another class of share
benefit to holder is that they can take advantage of capital gains of company by converting shares to common