Equities: Preferred Stock

Question 1

Equities- PREFERRED STOCK
ISSUANCE OF PREFERRED STOCK
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1)Preferred stock is termed “senior” security because?2) What is par value, can it vary, and why? 3) how does the dividend work? 4) how often is a dividend paid 5) how does preferred stock compare to common stock’s dividend 6) can the board omit a preferred dividend 7) price of preferred stock influenced by future expectations for earnings and dividend? 8) When interest rates fall, preferred stock prices do what? 9) can dividend share in earnings increases= higher dividend like common stock? 10) Preferred stocks are bought typically by who, and why 11) If corporation who buys more than 20% of outstanding shares what is the tax

Answer 1

1)Priority over common stock on Claim To Dividend And Corporate Assets in liquidation 2) $100, can be $25 or $50 per share to make it more affordable for investors 3) stated as a percentage of par value (similar to the interest rate on a bond). example company issues $100 par 10% preferred stock, the dividend would be 10% off $100=$10/ year. 4) semiannually, similar to bond interest payments. 5) Preferred is fixed, while common is discretionary by the board 6) yes 7) no 8) rise, if rates rise, prices fall 9)no 10) corporations, 50% of dividends (both common and preferred dividends) received are excluded from taxation (individual investors do not get this tax break). 11) 65%

Question 2

Equities- PREFERRED STOCK
INTEREST RATE MOVEMENTS AND PREFERRED STOCK PRICES
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1)price of preferred stock influenced by 2) is the dividend rate printed on the issued preferred stock? 3) is the dividend rate comparable to market? 4) is rate initially higher than common stock 5) What is the formula for current yield and what does it do. 6) The formula for market price

Answer 2

1)changes in interest rate 2) yes 3) yes 4) yes 5) gives us the theoretical market price, the formula is annual income/ market yield 6) annual income / market price

Question 3

Equities- PREFERRED STOCK
PREFERRED STOCK FEATURES
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1) can they vote 2) do preferred stock issuance dilute existing preferred holders return? 3) difference between preferred stock and bonds [6]

Cumulative preferred:
4) What happens if the issuer omits the dividend payment 5) before common dividends can be paid what must happen

Answer 3

1) no 2) no
3) Bonds mature on a set date - preferred has an indefinite life.
- Both bonds and preferred stock have fixed interest rates.
- Both bonds and preferred make payments semi-annually.
- Bonds have priority in liquidation over preferred.
- Bonds have legal rights to interest payments - preferred dividends are only paid if declared by the Board of Directors.
- Both bonds and virtually all preferred are cumulative.
- Both bonds and preferred can be callable and convertible.
4) it accumulates, and are paid if the issuer can ever resume making dividend payments 5) ll accumulated preferred dividends [including this year] must be paid

Question 4

Equities- PREFERRED STOCK
PREFERRED STOCK FEATURES [continued]
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Callable preferred
1) Issuers have the right to do what 2) at what price 3) more than likely a firm will call if what happens

Convertible preferred
4)converted into common based on a predetermined price? 5)If the market price of the common rises what happens to the convertible value? 6) Holders can enjoy capital appreciation if what happens 7) Issuers can sell convertible preferred at lower dividend rates why

Answer 4

1) call in” shares after a set date 2)usually at par or at a slight premium to 3) if interest rates have fallen [retire high rate shares- and issue new at the lower rate]
4) yes 5) it goes up 6)price of the common moves up 7) because of the potential value of the conversion feature.

Question 5

Equities- PREFERRED STOCK
PREFERRED STOCK FEATURES [continued]
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Participating Preferred
1) also known as what 2)In addition to the fixed dividend rate, holders “participate” in any what 3)Any extra dividend must be declared by 4) Because of the potential for extra dividends, the price of the stock will do what if extra dividends are declared 4.1) this happens without market interest rates doing what 5) if board give special additional dividend what two group get it?

Answer 5

1) performance preferred 2) extra” dividends. 3) Board of Directors 4) Rise 4.1) going down 5) Participating Preferred and common stock holders