Preferred Stock a hybrid security it's like common stock-no fixed maturity. technically, it's part of equity capitaL. it's like debt-preferred dividends are fixed missing a preferred dividend does not constitute default, but preferred dividends are cumulative
Preferred Stock A hybrid security: • it’s like common stock - no fixed maturity. – technically, it’s part of equity capital. • it’s like debt - preferred dividends are fixed. – missing a preferred dividend does not constitute default, but preferred dividends are cumulative
Preferred stock Usually sold for $25, $50, or $100 per share。 Dividends are fixed either as a dollar amount or as a percentage of par value Example: In 1988, Xerox issued $75 million of.25% preferred stock at $50 per share. S4.125 is the fixed, annual dividend per share
• Usually sold for $25, $50, or $100 per share. • Dividends are fixed either as a dollar amount or as a percentage of par value. • Example: In 1988, Xerox issued $75 million of 8.25% preferred stock at $50 per share. – $4.125 is the fixed, annual dividend per share. Preferred Stock
Preferred Stock Features Firms may have multiple classes of preferreds, each with different features Priority: lower than debt, higher than common stock。 Cumulative feature: all past unpaid preferred stock dividends must be paid before any common stock dividends are declared
• Firms may have multiple classes of preferreds, each with different features. • Priority: lower than debt, higher than common stock. • Cumulative feature: all past unpaid preferred stock dividends must be paid before any common stock dividends are declared. Preferred Stock Features
Preferred Stock Features Protective provisions are common Convertibility: many preferreds are convertible into common shares Adjustable rate preferreds have dividends tied to interest rates Participation: some(very few) preferreds have dividends tied to the firms earnings
• Protective provisions are common. • Convertibility: many preferreds are convertible into common shares. • Adjustable rate preferreds have dividends tied to interest rates. • Participation: some (very few) preferreds have dividends tied to the firm’s earnings. Preferred Stock Features
Preferred Stock Features PIK Preferred: Pay-in-kind preferred stocks pay additional preferred shares to investors rather than cash dividends Retirement: Most preferreds are callable, and many include a sinking fund provision to set cash aside for the purpose of retiring preferred shares
• PIK Preferred: Pay-in-kind preferred stocks pay additional preferred shares to investors rather than cash dividends. • Retirement: Most preferreds are callable, and many include a sinking fund provision to set cash aside for the purpose of retiring preferred shares. Preferred Stock Features