preferred stock

• Preferred Stock

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Corporate finance - Preferred stock

1 higher ranking) to common stock, but subordinate to Bond (finance)|

bonds in terms of claim (or rights to their share of the assets of the

company).Drinkard, T., A Primer On Preferred Stocks., [

http://www.investopedia.com/articles/stocks/06/preferredstock.asp?

viewed=1 Investopedia]



1 Preferred stock usually carries no voting rights,Preferred Stock ... generally carries

no voting rights unless scheduled dividends have been omitted. – [

http://www.quantumonline.com/glossary.cfm Quantum Online] but may carry a dividend and may have priority over

common stock in the payment of dividends and upon liquidation. Terms of the preferred

stock are stated in a Certificate of Designation.



1 Similar to bonds, preferred stocks are rated by the major credit-rating

companies. The rating for preferreds is generally lower, since preferred dividends do not carry the same guarantees as interest payments

from bonds and they are junior to all creditors.Drinkard, T.



1 Preferred stock is a special class of shares which may have any combination of features not

possessed by common stock.



1 The following features are usually associated with

preferred stock:.


Working capital management - Preferred stock

1 Preferred stock usually carries no voting rights,Preferred Stock ... generally carries no

voting rights unless scheduled dividends have been omitted. –

[http://www.quantumonline.com/glossary.cfm Quantum Online] but may carry a dividend and may have priority over

common stock in the payment of dividends and upon liquidation. Terms of the preferred

stock are stated in a Certificate of Designation.


Preferred stock

1 Terms of the preferred stock are

described in the articles of

associationhttps://store.theartofservice.com/the-preferred-stock-toolkit.html

Preferred stock - Preference in dividends

1 In general, preferred stock has preference in dividend payments.

The preference does not assure the payment of dividends, but the company must pay the stated

dividends on preferred stock before paying any dividends on common

stock.


Preferred stock - Preference in dividends

1 preferred stock; any dividends passed are lost if not declared..


Preferred stock - Other features or rights

1 * Preferred stock may or may not have a fixed liquidation value (or par

value) associated with it. This represents the amount of capital

which was contributed to the corporation when the shares were

first issued.[https://www.delawareinc.com

/101/index.cfm?pageid=10071 Harvard Business Services, Inc.]

Accessed February 23, 2007https://store.theartofservice.com/the-preferred-stock-toolkit.html

Preferred stock - Other features or rights

1 * Preferred stock has a claim on liquidation proceeds of a stock corporation equal to its par (or

liquidation) value, unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claimant|residual

claim.


Preferred stock - Types

1 In addition to straight preferred stock, there is diversity in the

preferred stock market. Additional types of preferred stock include:



1 * Prior preferred stock—Many companies have different issues of preferred stock outstanding at one time; one issue is

usually designated highest-priority. If the company has only enough money to meet

the dividend schedule on one of the preferred issues, it makes the payments on

the prior preferred. Therefore, prior preferreds have less credit risk than other preferred stocks (but usually offers a lower

yield).https://store.theartofservice.com/the-preferred-stock-toolkit.html


1 * Preference preferred stock—Ranked behind a company's prior preferred stock (on a seniority basis) are its preference preferred issues. These issues receive preference over all other classes of the company's preferred (except for prior

preferred). If the company issues more than one issue of preference preferred, the

issues are ranked by seniority. One issue is designated first preference, the next-senior

issue is the second and so on.https://store.theartofservice.com/the-preferred-stock-toolkit.html


1 It is a one-way deal; one cannot convert the common stock back to preferred stock



1 * Cumulative preferred stock—If the dividend is not paid, it will accumulate for future

payment.



1 * Exchangeable preferred stock—This type of preferred stock carries an

embedded option to be exchanged for some other security.



1 * Participating preferred stock—These preferred issues offer holders the opportunity to receive

extra dividends if the company achieves predetermined financial goals. Investors who purchased these stocks receive their regular dividend regardless of company performance (assuming the company does well enough to

make its annual dividend payments). If the company achieves predetermined sales,

earnings or profitability goals, the investors receive an additional dividend.



1 * Perpetual preferred stock—This type of preferred stock has no fixed

date on which invested capital will be returned to the shareholder

(although there are redemption privileges held by the corporation);

most preferred stock is issued without a redemption date.



1 * Putable preferred stock—These issues have a Put option|put

privilege, whereby the holder may (under certain conditions) force the

issuer to redeem shares.



1 * Monthly income preferred stock—A combination of preferred stock and

subordinated debt



1 * Non-cumulative preferred stock—Dividends for this type of preferred stock will not

accumulate if they are unpaid; very common in TRuPS and bank preferred stock, since

under Bank for International Settlements|BIS rules preferred stock must be non-

cumulative if it is to be included in Tier 1 capital.Basel Committee on Banking

Supervision [Minimum Capital Requirements http://www.bis.org/publ/bcbs128b.pdf]

Accessed 2007-1-12


Preferred stock - Usage

1 Preferred stocks offer a company an alternative form of financing - for example through Pension led funding|pension-led

funding; in some cases, a company can defer dividends by going into arrears with little

penalty or risk to its credit rating, however, such action could have a negative impact on

the company meeting the terms of its financing contract.. With traditional debt,

payments are required; a missed payment would put the company in default.


Preferred stock - Usage

1 Some corporations contain provisions in their charters authorizing the

issuance of preferred stock whose terms and conditions may be

determined by the board of directors when issued


Preferred stock - Users

1 In many countries, banks are encouraged to issue preferred stock as a source of Tier 1

capital



1 A company may issue several classes of preferred stock. It may undergo several rounds of financing, with

each round receiving separate rights and having a separate class of

preferred stock. Such a company might have Series A Preferred, Series

B Preferred, Series C Preferred and common stock.



1 In the United States there are two types of preferred stocks: straight

preferreds and convertible preferreds



1 There are income-tax advantages generally available to corporations investing in preferred stocks in the

United States. See Dividends received deduction.



1 Through preferred stock, financial institutions are able to gain leverage while receiving Tier 1 equity credit.


Preferred stock - Germany

1 Industry stock indices usually do not consider preferred stock in

determining the daily trading volume of a company's stock; for example, they do not qualify the company for a listing due to a low trading volume

in common stocks.


Preferred stock - United States

1 This has led to the development of Trust-preferred security|TRuPS: debt instruments with the same properties

as preferred stock


Preferred stock - United States

1 The size of the preferred stock market in the United States has been

estimated as $100billion (), compared to $9.5trillion for equities

and US$4.0trillion for bonds.Standard Poor's

[http://www2.standardandpoors.com/spf/pdf/index/Preferred_Stock_Primer

_2009.pdf?vregion=usvlang=en] 2009-08-27


Preferred stock - Other countries

1 *Czech Republic – Preferred stock cannot be more than 50 percent of total equity.


Preferred stock - Other countries

1 *Brazil – In Brazil, up to 50 percent of the capital stock of a company may be composed of preferred stock. The preferred stock will have at least one

less right than the common stock (normally voting power), but will

have preference in receiving dividends.


Monthly income preferred stock

1 'Monthly income preferred stock' or 'MIPS' is a hybrid security created

by Eli Jacobson,http://sullcrom.com/jacobsoneliyahud/ a Sullivan Cromwell tax

partner, and introduced to the market by Goldman Sachs in 1993.

[http://findarticles.com/p/articles/mi_m4130/is_2_29/ai_67720678 Raising

Capital Using Monthly Income Preferred Stock: Market Reaction and

Implications for Capital Structure Theory] In essence, MIPS is a

combination of deeply subordinated debt and preferred stock.



1 A special purpose entity of the issuer sells the preferred stock to the public and then lends the proceeds to the

parent



1 Because of these features, MIPS at one point dominated the market for traditional

perpetual preferred equity, accounting for over 70% of all new preferred

issues.[http://findarticles.com/p/articles/mi_m4130/is_2_29/ai_67720678 Raising Capital

Using Monthly Income Preferred Stock: Market Reaction and Implications for Capital

Structure Theory] However, MIPS as a tax shelter no longer works. The credit rating

agencies consider MIPS to be preferred stock.


Participating preferred stock

1 Holders of participating preferred stock get both their money back

(with interest) and the money that is distributable with respect to the

percentage of common shares into which their preferred stock can

convert



1 Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate



1 The main benefit to owning preferred stock is that the investor has a greater claim on

the company’s assets than common stockholders. Preferred shareholders always

receive their dividends first and, in the event the company goes bankrupt,

preferred shareholders are paid off before the holders of common stock. In general, there are four different types of preferred

stock: cumulative preferred, non-cumulative, participating, and convertible.


Convertible preferred stock

1 Terms of the preferred stock are described in the articles of

association


Convertible preferred stock

1 Similar to bonds, preferred stocks are rated by the major credit-rating

companies. The rating for preferreds is generally lower than for bonds

because preferred dividends do not carry the same guarantees as

interest payments from bonds and because preferred-stock holders' claims are junior to those of all

creditors.https://store.theartofservice.com/the-preferred-stock-toolkit.html

Convertible preferred stock - Preference in dividends

1 preferred stock; any dividends passed are lost if not declared..


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