Classes of Stock

Question 1

Common Stock

Answer 1

Type of ownership interest that represents the RESIDUAL value of the corp

• has no special contract rights or preferences (so creditors and preferred SHs must receive their required interest before common receives anything)
• No fixed maturity date
• CSHs usually have the exclusive right to elect the BOD (may also get to vote on mergers and other important matters)
• receive dividends in return for their investment

Question 2

Preferred Stock

Answer 2

Type of ownership interest that is given certain preferences and rights with regard to assets or dividends over common stock

• has contractual rights superior to those of common stock (“preferred to common stock”)
• Can be issued in classes or series (one class of preferred can be given preferences over another)
• Like common SHs, preferred have limited liability
• PSHs are generally not given the right to elect BOD
• Usually have a contractual right to dividends

Question 3

Liquidation Preference

Answer 3

The right to be paid before the common stockholders if the corporation is dissolved and liquidated. Usually stated in a dollar amount

Question 4

Dividend Preference

Answer 4

The right to receive a fixed dividend at set periods during the year, like every quarter. Rate is usually a set percentage of the initial offering price

Question 5

Dividend Preference: Cumulative Dividend Right

Answer 5

Corporations must pay a preferred dividend if they have the earnings to do so. Provides that any missed dividend payments must be paid in the future to preferred stockholders before the common stockholders can receive any dividends

Question 6

Dividend Preference: Non-cumulative preferred

Answer 6

Dividends do not cumulate: the corporation does not have to pay any missed dividends. For these shares, only the current year’s dividends must be paid to preferred shareholders prior to the payment of dividends to common shareholders.

Question 7

Participation Preference

Answer 7

Allows the stockholder to participate in the profits of the corporation, along with common SHs

• This is in addition to the fixed dividend paid on preferred stock
• Terms can vary widely. Usually, the common SHs must be paid a certain amount of dividends before this preference kicks in

Question 8

Conversion Right

Answer 8

Permits the stockholders to convert their shares into another security, typically, common stock after a predetermined time span or a specific date

• terms and exchange rate of the this right are established when the shares are first issued
• holders of this preferred stock usually exercise this option if the corporation’s stock increases significantly in value

Question 9

Redemption Right

Answer 9

Permits the corporation to buy back the preferred stock at some future date

• terms are established when the shares are first issued
• corporations usually redeem shares when the current interest rate falls below the dividend rate on the preferred stock

Question 10

“As if Converted” Right

Answer 10

Preferred stockholders usually have no voting rights. But this right allows preferred stockholders to have voting rights based on the votes they would have had if they hypothetically converted