Classes of Preferred Stock

Question 1

4 types of Preferred Stock

Answer 1

1) Cumulative
2) Participating
3) Convertible
4) Callable

**WILL BE ON EXAM

Question 2

Cumulative preferred stock

Answer 2

allows dividends to accumulate when a dividend payment is not made to a stockholder. If a corporation skips a dividend payment on cumulative preferred shares, it will have to pay the accrued dividend the next time it offers a dividend, before it pays common stockholders.

Question 3

Non-cumulative preferred stock

Answer 3

does not accrue unpaid dividends. Few companies issue shares of non-cumulative preferred, since they are unattractive to investors, but terms may sometimes be added to improve their value, such as fixing the number of allowable missed payments or automatically granting voting rights when a payment is missed. Non-cumulative typically offers higher dividends than cumulative preferred stock.

Question 4

Participating preferred stock

Answer 4

allows investors to receive extra dividends when the company exceeds some predetermined financial goals.

Question 5

participating preferred shares may have a _____ position during liquidation than non-participating preferred.

Answer 5

higher

Question 6

Most preferred stock is

Answer 6

non-participating

Question 7

convertible preferred stock

Answer 7

offers shareholders the chance to participate in the growth of a company. Convertible preferred stock offers investors the right to convert their preferred shares to common stock at a set conversion ratio.

Question 8

Conversion ratio =

Answer 8

Face value/conversion price

Question 9

parity price =

Answer 9

current market price x conversion ratio

Question 10

Callable preferred stock

Answer 10

gives the issuing company the right to call its shares after some set date and at a set price. An issuer will usually choose to call the stock if interest rates drop and the issuer can issue new preferred stock at a lower rate. Callable preferred stock is usually redeemed at a price that is higher than its par value.

Question 11

Protective provisions

Answer 11

are a relatively standard feature of preferred stocks and are often written into a company’s certificate of incorporation. Protective provisions permit preferred shareholders to veto certain actions by the company, such as the sale or merger of the company and the issuing of new shares.