Equity Securities; Preferred Stock

Question 1

PREFERRED STOCK

Answer 1

AN EQUITY SECURITY THAT PAYS A FIXED DIVIDEND BASED ON A PERCENTAGE OF ITS PAR

• PAR=$100
• DIVIDEND PERCENTAGE IS STATED ON THE CERTIFICATE
• PAYS A RELATIVELY HIGH DIVIDEND
• PREFERRED HOLDERS RECEIVES A DIVIDEND BEFORE COMMON
• UNLIKE COMMON, PREFERRED DOES NOT HAVE VOTING RIGHTS

Question 2

TYPES OF PREFERRED STOCK

Answer 2

CUMULATIVE

PARTICIPATING

CALLABLE

CONVERTIBLE

Question 3

CUMULATIVE PREFERRED STOCK

Answer 3

IF A COMPANY SKIPS A DIVIDEND, THIS REQUIRES UNPAID DIVIDENDS TO ACCUMULATE AND BE PAID IF/WHEN ISSUER STARTS PAYING DIVIDENDS AGAIN

Question 4

PARTICIPATING PREFERRED STOCK

Answer 4

IF A COMPANY IS DOING WELL, THIS ALLOWS INVESTORS TO RECEIVE EXTRA DIVIDENDS USUALLY WHEN THE COMPANY EXCEEDS SOME FINANCIAL GOALS

Question 5

CALLABLE PREFERRED STOCK

Answer 5

PERMITS THE COMPANY TO PAY BACK INVESTORS, USUALLY AT PAR VALUE, EFFECTIVELY RETIRING THE STOCK.

COMPANIES DO THIS WHEN INTEREST RATES DROP, SO THEY CAN SAVE MONEY BY ISSUING NEW PREFERRED STOCK OR DEBT AT A LOWER DIVIDEND OR INTEREST RATE.

Question 6

CONVERTIBLE PREFERRED STOCK

Answer 6

ALLOWS THE OWNER TO EXCHANGE THE PREFERRED STOCK FOR COMMON STOCK

NOT AS SENSITIVE TO INTEREST RATES

TIED TO PERFORMANCE OF COMMON STOCK

CONVERSION CAN TAKE PLACE WHENEVER THE INVESTOR WANTS TO!