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Preferred Stock

Preferred Stock

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Preferred Stock

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  1. Preferred Stock Company Accounting

  2. Outline • Definition • Rights • Characteristics of Preferred Stock • Types Preferred Stock • The following attributes of preferred stocks should be recognized • How Do I Buy Preferred Stock? • Preferred Stock Valuation • Risks of investing in preferred stocks

  3. Preferred Stock • Another way for a company to raise capital for its growth • It pays the preferred stockholder a fixed, agreed-upon dividend at regular intervals. • Anyone can purchase preferred stock and it can often be converted into common stock at a later stage

  4. Prior Preferred, First Claim Preferred, or Senior Preferred Stock • Auction-Rate and Stated Rate Auction Preferred Stocks (STRAPS) • Remarketed Preferred Stock • Fixed Rate Capital Securities (FRCS)

  5. Rights • The payment of dividends and upon liquidation of the company . • The dividend rights are often cumulative, such that if the dividend is not paid it accumulates from year to year. • Preferred stock has a claim on liquidation proceeds of a stock corporation.

  6. Almost all preferred shares have a negotiated fixed dividend amount. • Almost all preferred shares have a negotiated fixed dividend amount. • Some preferred shares have special voting rights to approve certain extraordinary events

  7. Usually preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim. • use preferred shares as means of preventing hostile takeovers,

  8. Characteristics of Preferred Stock • Preference as to the payment of dividends . • Assets - in the even of liquidation. • Convertibility. • Non-voting. • Callable.

  9. Types Preferred Stock • Perpetual Preferred Stock (Perpetuity) • Adjustable Rate Preferred Stock • Cumulative Preferred Stock • Convertible Preferred Stock • Callable Preferred Stock • Preferred Equity Redemption Cumulative Stock (PERCS) • Participating Preferred Stock

  10. The following attributes of preferred stocks should be recognized • A preferred stock may be likened to a bond with an infinite maturity . • Insofar as safety is concerned, all the preferred stocks of a company rank behind all of that company's bonds.

  11. Assuming that the preferred stock is sound, the primary determinant of its price is the level of interest rates • If a preferred stock (or a bond) is callable, it is even less desirable.

  12. How Do I Buy Preferred Stock? • Learn what the differences are between preferred stock and common stock. • Understand the advantages when you buy preferred stock. • Be aware of the disadvantages of preferred stock. • Open a brokerage account. • Research a company thoroughly before you purchase preferred stock

  13. Preferred Stock Valuation • Preferred stock has the following features: • Par Value • Preferred Dividend / Preferred Dividend Rate • preferred dividend rate • annual preferred dividend

  14. the following equation:

  15. Preferred Stock Valuation Example • Find the price of a share of preferred stock given that the par value is $100 per share, the preferred dividend rate is 8%, and the required return is 10%. • Solution:

  16. Risks of investing in preferred stocks • Preferred stocks can default. • Some preferred stocks come with a call or mandatory conversion feature. • In general, preferred stocks have lower liquidity than common stocks. • Preferred stocks are often rated by ratings agencies and may drop in price if their ratings are reduced. • Historically, preferred stocks have generally shown little price appreciation potential.

  17. References • http://useconomy.about.com/od/glossary/g/preferred_stock.htm • http://www.roycefunds.com/Funds/Closed/closedEndPreferred.asp • http://www.tdwaterhouse.co.uk/learn/shares/preferred.cfm • http://www.fool.com/investing/dividends-income/2007/07/17/preferred-stock-basics.aspx • http://www.money-zine.com/Investing/Stocks/Buying-Preferred-Stock • http://thismatter.com/money/bonds/types/preferred_stock.htm • http://www.journalofaccountancy.com/Issues/2007/Feb/ValuingPreferredStock.htm • http://www.dows.com/Publications/PreferredStocks.htm • http://investorshub.advfn.com/boards/board.aspx?board_id=15346 • http://www.zenwealth.com/BusinessFinanceOnline/SV/PreferredStock.html • http://www.accountingcoach.com/online-accounting-course/17Xpg07.html • http://deepthought.ttu.ee/majandus/tekstid/TUTWPE_07_165.pdf • http://www2.standardandpoors.com/spf/pdf/index/Preferred_Stock_Primer_2009.pdf • http://www.beginnermoneyinvesting.com/html/investing_in_preferred_stock.htm