of Types Stock
Common Stock: when only one class of stock is outstanding
All stockholders have equal voting rights
Preferred stock: typically having priority over common shares in
Dividend distributions: they get dividends before common stock holders get it
Distributions of assets in case of liquidation: if the company ceases to exist, the preferred
shareholders get the money first
Usually has a stated dividend rate
Normally has no voting rights
Reasons for issuing preferred stock
To raise capital without sacrificing control
To boos the return earned by common stockholders through financial leverage
To appeal to investors who may believe the common stock is too risky or that the expected return
on common stock is too low
Types of preferred stock
Cumulative: dividends not paid to stockholders in a particular year, have to be paid in another
year
Dividend in arrears: must be paid before dividends may be paid on common stock
Noncumulative: any dividends not paid in a particular year are lost
Undeclared dividends from current and prior years dont have to be paid in future years
Most stock preferred is cumulative
Cumulative and noncumulative divided
Example: consider the following stockholders
Equity section of the balance sheet
The board of directors didnt declare or pay dividends in 2007. IN 2008, the Board of Directors
declare and pay cash dividends of $27,000
Dividends are paid only on outstanding shares
If preferred stock is non-cumulative
Preferred dividends
Year 2007 - $0
Year 2008 - $6,000
Common dividends
Year 2007 - $0
Year 2008 - $21,000
If the preferred stock is cumulative
Preferred dividends
Year 2007 - $0
Year 2008 - $12,000
Common dividends
Year 2007 - $0
Year 2008 - $15,000
Other types of preferred stock
Participating: dividends may exceed a stated amount once common stockholders receive a
dividend equal to the preferred stated rate
Nonparticipating: dividends are limited ot a maximum amount each year
The maximum is usually the stated rate.
Most preferred stock is nonparticipating
Convertible: right to be converted to fixed number of common shares
Callable: issuing company can purchase or retire stock at specified future prices