Preferred Stock

12 Key excerpts on "Preferred Stock"

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  eBook - PDF

  Financial Accounting Theory and Analysis

  Text and Cases

  • Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  This results in an additional class of stock, termed Preferred Stock, that can have either or both of the following features: a. Preference as to dividends b. Preference as to assets in liquidation 20 Philip Ameen, “Comment Letter on Exposure Draft Accounting for Financial Instrument with Characteristics of Liabilities, Equity or Both,” May 18, 2001. 554 EQUITY Traditionally, utilities were the largest issuers of Preferred Stock because selling preferred shares does not affect a company’s debt cost. Recently, banks and other financial institutions have also become more active in Preferred Stock offerings because of new federal requirements. Preferred Stock is most often acquired by corporate investors because of the dividend exclusion rule allowed under the Internal Revenue Code. 21 The corporate form of business organization allows management specialists to be employed. The owners thereby gain an expertise not normally available in sole proprietorships or partner- ships. Evidence of the extent of this advantage can be found in the growth of business schools in the major universities. A large percentage of the students in these programs are in training to obtain employment in large corporations. As noted earlier, two major types of stock may be found in any corporation: Preferred Stock and common stock. Preferred Stockholders give up one or more of the rights usually accruing to stockholders for preference as to dividends or to assets in liquidation. Common stockholders retain these rights and have a residual claim on both the earnings and assets in liquidation. The capital section of a corporation’s balance sheet is usually subdivided into several compo- nents.

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  eBook - PDF

  Mathematical Interest Theory

  Third Edition

  • Leslie Jane Federer Vaaler, Shinko Kojima Harper, James W. Daniel(Authors)
  • 2019(Publication Date)
  • American Mathematical Society

    (Publisher)

  In summary, you might purchase common stock in a company because you believe that the corporation will increase in value or that it will pay attractive dividends. If the company loses money, your share will decline in value. A second type of equity investment that a corporation may issue is pre-ferred stock . If you purchase shares of Preferred Stock, then you are buying the right to certain future earnings, again called dividends , as spelled out in 327 328 Chapter 7 Stocks and financial markets the stock offering. In the United States, stock dividends are usually paid quar-terly. Preferred Stock dividends are most often fixed, although participating Preferred Stock pays extra dividends if the company has sufficient profits, and adjustable Preferred Stock pays dividends that change each period based on some set formula: Most likely the size of the dividend depends on the yield earned by holders of Treasury bills or on some other market rate. The payment of dividends on Preferred Stock is guaranteed so long as the company has first paid its creditors. So, Preferred Stockholders may re-ceive dividends when common stockholders receive none; thus, the name “pre-ferred.” In addition, if the Preferred Stock is cumulative , should dividends fail to be paid for some period, they accrue until the company can pay them. In case the issuing company declares bankruptcy, once again bondholders have priority over stockholders, but Preferred Stockholders’ claims are met prior to common stockholders’. To compensate for the fact that Preferred Stockholders have less potential for capital appreciation than the holders of common stock, the dividends paid on Preferred Stocks tend to be higher than those received on common stock. In general, the performance of the issuing company has much less effect on the price of Preferred Stock than it does on common stock prices.

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  eBook - PDF

  Intermediate Accounting, Student Practice and Solutions Manual

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  In cases where the fair mar- ket value of both items is not clearly determinable, the board of directors has the authority to establish a value for the transaction. Costs of Issuing Stock Direct costs incurred to sell stock such as underwriting costs, accounting and legal fees, and printing costs should be debited to Additional Paid-in Capital. Management salaries and other indirect costs related to the stock issue should be expensed as incurred. Preferred Stock Preferred Stock is the term used to describe a class of stock that possesses certain preferences or features not possessed by the common stock. The following features are those most often associated with Preferred Stock issues: a. Preference as to dividends. b. Preference as to assets in the event of liquidation. c. Convertible into common stock. d. Callable at the option of the corporation. e. Nonvoting. Some features used to distinguish Preferred Stock from common stock tend to be restrictive. For example, Preferred Stock may be nonvoting, noncumulative, and nonparticipating. A corporation may attach whatever preferences or restrictions in whatever combination it desires to a Preferred Stock issue so long as it does not specifically violate its state incorporation law. The dividend preference of Preferred Stock is normally stated as a percentage of the Preferred Stock’s par value. For example, 9% Preferred Stock with a par value of $100 entitles its holder to an annual dividend of $9 per share. Certain terms are used to describe various features of Preferred Stock. These terms are the following: a. Cumulative. Dividends not paid in any year must be made up in a later year before any profits can be distributed to common stockholders. Unpaid annual dividends on cumula- tive Preferred Stock are referred to as dividends in arrears. b. Participating. Holders of participating Preferred Stock share with the common stock- holders in any profit distribution beyond a prescribed rate.

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  Intermediate Accounting

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  As indicated in the preceding section, each share of stock of a given issue has the same inherent rights as other shares of the same issue. By special stock contracts between the corporation and its stockholders, however, the stock- holder may sacrifice certain of these rights in return for other special rights or privileges. Thus, special classes of stock, usually called Preferred Stock, are created. In return for any special preference, the Preferred Stockholder always sacrifices some of the inherent rights of common stock ownership. A common type of preference is to give the Preferred Stockholders a priority claim on earnings. The corporation thus assures them a dividend, usually at a stated rate, before it dis- tributes any amount to the common stockholders. In return for this preference, the Preferred Stockholders may sacrifice their right to a voice in management or their right to share in prof- its beyond the stated rate (see Global View). Components of Stockholders’ Equity Owners’ equity in a corporation is defined as stockholders’ equity, shareholders’ equity, or cor- porate capital. The following four categories normally appear as part of stockholders’ equity: 1. Capital stock. 2. Additional paid-in capital. 3. Retained earnings. 4. Accumulated other comprehensive income. The first two categories, capital stock and additional paid-in capital, constitute contrib- uted (paid-in) capital. Contributed (paid-in) capital is the total amount paid in on capital stock—the amount provided by stockholders to the corporation for use in the business. Con- tributed capital includes items such as the par value of all outstanding stock and premiums less discounts on issuance. Earned capital is the capital that develops from profitable operations. It consists of all undistributed income that remains invested in the company. Retained earnings represents the earned capital of the company.

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  eBook - PDF

  Business Law and the Regulation of Business

  • Richard Mann, Barry Roberts(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  See Chapter 36. Common Stock [34-4a] Common stock does not have any special contract rights or preferences. Frequently the only class of stock out- standing, it generally represents the greatest proportion of the corporation’s capital structure and bears the greatest risk of loss should the enterprise fail. Preferred Stock [34-4b] Stock generally is considered Preferred Stock if it has con- tractual rights superior to those of common stock with regard to dividends, assets on liquidation, or both. (Most Preferred Stock has both dividend and liquidation prefer- ences.) Other special rights or privileges generally do not remove stock from the common stock classification. The articles of incorporation must provide for the contractual rights and preferences of an issue of Preferred Stock. Dividend Preferences Though the holders of an issue of Preferred Stock with a dividend preference will receive full dividends before any dividend may be paid to holders of common stock, no dividend is payable on any class of stock, common or preferred, unless the board of directors has declared such dividend. Preferred Stock may provide that dividends are cumula- tive, noncumulative, or cumulative to the extent earned. For cumulative dividends, if the board does not declare PRACTICAL ADVICE When organizing a corporation, consider issuing common stock to the original shareholders and Preferred Stock to subsequent investors. 749 Chapter 34 Financial Structure of Corporations TYPES OF DIVIDENDS AND OTHER DISTRIBUTIONS [34-5] The Revised Act defines a distribution as [A] direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedness by a corporation to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a declaration or payment of a dividend; a purchase, redemp- tion, or other acquisition of shares; a distribution of indebt- edness; or otherwise.

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  eBook - ePub

  Valuing Early Stage and Venture-Backed Companies

  • Neil J. Beaton(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  Preferred Stock gives its holders numerous rights and privileges that common stockholders do not enjoy. These rights and privileges explain some, if not most, of the fair market value differential between Preferred Stock and common stock. These provisions are used to provide investors with downside protection as well as some additional control over management and company activities. Moreover, investors use these provisions to align the incentives of the company’s management team, which typically holds common stock, with the investor’s investment objectives. Preferred Stock is ultimately a vehicle with which companies attempt to satisfy investor demands in order to attract capital.

  The core rights of Preferred Stock are typically set forth in a company’s organizing documents. For Delaware corporations, the organizing document is known as a Certificate of Incorporation. These core rights are discussed in the following text and account for the most important differences between preferred and common stock. Other rights typically granted to holders of Preferred Stock are found not in the company’s organizing document but rather in separate contracts (e.g., an Investor’s Rights Agreement). These rights are discussed in a later section.

  It goes without saying, but it is still important to note, that the rights and privileges of Preferred Stock exist only so long as preferred holders do not convert to common stock. As discussed subsequently, Preferred Stockholders can give up their preferred rights and convert to common stock, often at any time and at their discretion. The dynamics surrounding conversion underlie many of the important differences between preferred and common stock. Generally, Preferred Stockholders are unlikely to convert. Instead, they typically choose to hold onto their Preferred Stock and benefit from higher returns and control over the company. This “option” may be difficult to measure, but it clearly possesses value to the holder. The valuation techniques presented in this book attempt to capture this “option” value, but it is often elusive; it even differs among VCs, companies, industries, and economic cycles.

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  eBook - PDF

  Venture Capital Law in China

  • Lin Lin(Author)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  56 This limits the dividends that original shareholders can receive, preventing them from cashing out of the business by declaring dividends. This in turn protects the interests of venture capitalists by ensuring that any capital supplied by venture capitalists cannot be withdrawn and is, instead, used to further develop the business. 57 Besides this protective function, a priority in dividends is also directly economically valuable to investors if it provides for cumulative divi- dends, allowing dividends to automatically accrue and become senior claims in favour of investors if they remain unpaid upon the company’s liquidation. 58 In the Term Sheet, the language is often as follows: The holders of the Series A Preferred Stock shall be entitled to receive [non] cumulative dividends in preference to any dividend on the Common Stock at the rate of [x%] of the Original Purchase Price per annum [when and as declared by the Board of Directors]. The holders of Series A Preferred Stock shall also be entitled to participate pro rata in any dividends paid on the Common Stock on an as-of-converted basis. 59 3.2.2.2 Legal Status in China Priority in dividends is widely recognised in countries such as the US and the UK. 60 However, its legal status is uncertain in China. In the case of LLCs, the PRC Company Law stipulates that a shareholder shall receive dividends in proportion to its paid-up capital contribution, except where all shareholders agree otherwise. 61 PRC 55 B. Feld and J. Mendelson, supra note 29, p. 82. 56 Ibid., p. 81. 57 W. Bratton and M. Wachter, ‘A Theory of Preferred Stock’, University of Pennsylvania Law Review, 161 (2013), 1815, at 1825. 58 M. D. Klausner and K. Litvak, supra note 4. 59 B. Feld and J. Mendelson, supra note 29. 60 Thomsen Reuters Practical Law, Preference Shares, online: https://uk .practicallaw.thomsonreuters.com/7-107-7028?transitionType=Default&contextData= (sc.Default)&firstPage=true&bhcp=1 (accessed 9 December 2019).

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  Intermediate Accounting

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  Stockholders’ or owners’ equity is classified into two categories: contributed capital and earned capital. Contributed capital (paid-in capital) describes the total amount paid in on capital stock. Put another way, it is the amount that stockholders invested in the corporation for use in the business. Contributed capital includes items such as the par value of all outstanding capital stock and premiums less any discounts on issuance. Earned capital is the capital that develops if the business operates profitably; it consists of all undistributed income that remains invested in the company. Accounts are kept for the following different types of stock. Par value stock: (a) Preferred Stock or common stock, (b) paid-in capital in excess of par or additional paid-in capital, and (c) discount on stock. No-par stock: common stock or common stock and additional paid-in capital, if stated value used. Stock issued in combination with other securities (lump-sum sales): The two methods of allocation available are (a) the proportional method and (b) the incremental method. Stock issued in noncash transactions: When issuing stock for services or property other than cash, the company should record the property or services at either the fair value of the stock issued, or the fair value of the noncash consideration received, whichever is more clearly determinable. Preferred Stock is a special class of shares that possesses certain preferences or features not possessed by the common stock. The features that are most often associated with Preferred Stock issues are (1) preference as to dividends, (2) preference as to assets in the event of liquidation, (3) convertible into common stock, (4) callable at the option of the corporation, and (5) nonvoting. At issuance, the accounting for Preferred Stock is similar to that for common stock. When convertible Preferred Stock is converted, a company uses the book value method.

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  eBook - PDF

  Fundamentals of Financial Instruments

  An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives

  • Sunil K. Parameswaran(Author)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 3 Equity Shares, Preferred Shares, and Stock Market Indices INTRODUCTION Equity shares, or shares of common stock of a company, are a type of financial claim issued by the firm to investors, who are referred to as shareholders. In return for their investment, the shareholders are conferred with ownership rights. A firm must have a minimum of one shareholder, and there is no limit to how many shareholders a firm may have. Correspondingly, there is no restriction on the total number of shares that may be issued by a firm. Large corporations have a large number of shares out-standing, and consequently their ownership is spread over a vast pool of investors. Shareholders are part owners of the company to whose shares they have subscribed, and their stake is equal to the fraction of the total share capital of the firm to which they have contributed. At the outset, when a firm is incorporated a stated number of shares will be authorized for issue by the promoters. The value of such shares is referred to as the authorized capital of the firm; however, the entire authorized capital need not be raised immediately. In practice, often a portion of what has been authorized is held for issue at a later date, if and when the firm should require additional capital. Thus, what is actually issued is less than or equal to what is authorized and the amount that is actually raised is referred to as the issued capital . The value of the shares that is currently being held by the investors is referred to as the outstanding capital . In most cases, the outstanding capital is synonymous with the issued capital. In the event of a company buying back shares from the public, however, the outstanding capital will decline and consequently will be less than what was issued. Shareholders are entitled to share the profits made by the firm, as they represent the owners of the venture.

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  Wiley Pathways Personal Finance

  Managing Your Money and Building Wealth

  • Vickie L. Bajtelsmit, Linda G. Rastelli(Authors)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  12.1.1 What Is Common Stock and Why Is It Issued? Common stock represents a share of ownership in a corporation, a type of busi- ness organization that exists as a legal entity separate from its owners, the share- holders. The corporate form of organization enables the company to have many owners with limited rights and obligations. In contrast, the owners of companies organized as sole proprietorships and partnerships have more extensive rights (e.g., the ability to directly participate in the management of the business), but they also have greater responsibility (e.g., personal liability for the debts of the business). Corporations can be clas- sified as private or public. Private corporations have few shareholders, and their stock isn’t usually bought or sold. In this chapter, we’re primarily concerned with public corporations, whose stock is traded (i.e., bought and sold by individual investors) in the securities market. When you purchase shares of common stock in a public corporation, you’re buying an ownership interest. Each shareholder owns a proportionate share of the firm equal to the number of shares owned, divided by the total number of shares. A common shareholder’s claim on the firm is said to be a residual claim, which means the person shares in the assets and income of the corporation, but only after other, higher-priority claims (e.g., interest payments on bonds) are satisfied. If the firm goes bankrupt, each shareholder is entitled to a pro- portionate share of whatever is left over after all the firm’s creditors are paid back. 308 INVESTING IN STOCKS AND BONDS 12.1 COMMON STOCK 309 Even multi-billion-dollar companies such as Wal-Mart and Microsoft began as small private companies with only a few owners. Those owners eventually found it necessary to sell shares of stock to the public to get the funds needed to grow their companies.

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  Venture Capital and the Finance of Innovation

  • Andrew Metrick, Ayako Yasuda(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  9 Preferred Stock In the United States, VCs almost always use Preferred Stock in their transactions. This Preferred Stock comes in many flavors. In Section 9.1 of this chapter, we analyze the main types of Preferred Stock and learn how to graphically represent them. Most types of Preferred Stock are convertible into common stock, either at the discretion of the investor (voluntary conversion) or when some preset threshold is reached (automatic conversion). These conversion conditions are sometimes adjusted due to antidilution protections, as first mentioned in Chapter 8, and IPO ratchet provi- sions. In Sections 9.2 and 9.3 of this chapter, we provide mathematical formulas and examples to illustrate the impact of antidilution protections and IPO ratchets, respectively. 9.1 Types of Preferred Stock In public markets, the vast majority of equity investments are made with common stock, which are equity claims that are paid last upon any liquidation of the company. However, for VC transac- tions in the United States, nearly all the investments are made with Preferred Stock. The key char- acteristic of Preferred Stock is that it has a liquidation preference to common stock. This is seen in the Newco charter of Chapter 8, where the Preferred Stock has a liquidation preference (for $5M APP) and an optional conversion (for 5M shares, representing one-third of the fully diluted share count). These two features define the Series A Newco stock as convertible preferred (CP). With CP, EBV must decide at the time of exit whether to redeem (and receive all proceeds up to $5M, but nothing else) or to convert to 5M shares and receive one-third of all proceeds. The key step here is the determination of the conversion condition, an inequality defining the level of proceeds where conversion is more valuable than redemption. We call this level the conversion point. The conversion point for a Series A investment is written as W A .

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  eBook - PDF

  Introduction to Corporate Finance

  • Laurence Booth, Ian Rakita(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  If, in any quarter, the BOD decides not to pay a dividend, the holders of preferred shares cannot seek legal action to force payment. This legal principle gives a firm some flexibility if it runs into serious financial trouble, because it can conserve cash by suspending the dividend payments, whereas it cannot unilaterally suspend interest payments. However, because they don’t carry a right to receive a dividend, most preferred shares do have a cumulative provision, which states that no dividends can be paid on common shares until preferred share dividends, both current and arrears, are paid in full. This ensures that the common shareholders, who have voting rights, don’t suspend payment on the preferred share dividends while continuing to pay dividends on the common shares. Some preferred shares also get limited voting rights as the arrears accumulate, which allows the preferred sharehold- ers to exercise some control over the company. However, these rights depend on the structure of the preferred shares. 13 Commonly, firms experiencing financial trouble will suspend dividend payments on all classes of shares, including preferred shares, to conserve cash. If the firm then recovers, it must make significant cash payments to clear off the preferred dividend arrears. In practice, what often happens in these situations is that the arrears are paid through the issue of com- mon shares or some combination of cash and shares. This allows the firm to clean up its bal- ance sheet and start fresh. An example of a traditional straight preferred issue is the series G preferred shares issued by Great-West Lifeco Inc. Great-West Lifeco has several series of preferred shares outstand- ing, each with slightly different features. As with other classes of shares, Great-West Lifeco’s authorized capital allows it to issue more of these shares if it wants, or it can start another series.

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