Stocks Flashcards
Which kind of stocks exist?
Preferred Stock (Hybrid Security that has many aspects of common stocks and bonds)
Common Stock
What is the Hybrid Nature of Preferred Stocks?
Like stocks:
Have no fixed maturity date
Failure to pay dividend does not lead to bankruptcy
Not a tax-deductible expense
Like bonds:
Dividens are fixed in amount
What are the characteristics of preferred stocks?
Multiple series of preferred stock
Preferred stocks’s claim on assets and income
Cumulative dividends
Protective provisions
Convertibility
Retirement features
Explain Multiple series
A company can issue more than one series of preferred stock and each serie can have different characteristics
Explain Claim on Assets and Income
Claim on Assets: Preferred stock has priority over common stock with regard to claim on assets in the case of bankruptcy.
Preferred stockholders claims are honored before common stockholders, but after bonds.
Claim on Income: Preferred stock also has priority over common stock with regard to dividend payments.
Thus preferred stocks are safer than common stock but riskier than bonds.
Explain cumulative dividends
Requires that all past, unpaid preferred stock dividends be paid vefore common stock dividends are declared
Explain Protective Provisions
Allow for voting right in the event of nonpayment of dividends
Explain Convertibility
Convertible preferred stock can be converted into a predetermined number of shares of common stock
Explain Retirement Features
Method of retiring the stock such as call provision or sinking fund provision
What is the value of preferred stocks?
Equal to the present value of all future dividends
= Annual dividend / required rate of return
What are features of common stocks?
Claim on income
Claim on assets
voting rights
preemptive rights
How to value common stocks
Present value of all future expected dividends
Dividends are not fixed / guaranteed -> harder to value than bonds or preferred stocks
