CHAPTER 8

CHAPTER 8 - CHAPTER 8 Valuation and Characteristics of...

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CHAPTER 8 Valuation and Characteristics of Stock Orientation : This chapter continues the introduction of concepts underlying asset valuation began in Chapter 7. We are specifically concerned with valuing preferred stock and common stock. We also look at the concept of a stockholder’s expected rate of return on an investment. I. Preferred Stock A. Features of preferred stock 1. Owners of preferred stock receive dividends instead of interest. 2. Most preferred stocks are perpetuities (non-maturing). 3. Multiple series, each having different characteristics, can be issued. 4. Preferred stock has priority over common stock with regard to claims on assets in the care of bankruptcy. 5. Most preferred stock carries a cumulative feature that requires all past unpaid preferred stock dividends to be paid before any common stock dividends are declared. 6. Preferred stock may contain other protective provisions. 7. Preferred stock may contain provisions to convert to a predetermined number of shares of common stock. 8. Retirement features for preferred stock are frequently included. a. Callable preferred refers to a feature which allows preferred stock to be called or retired, like a bond. b. A sinking fund provision requires the firm periodically to set aside an amount of money for the retirement of its preferred stock. B.
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This note was uploaded on 06/23/2008 for the course FIN 3310 taught by Professor Potts during the Spring '08 term at Baylor.

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CHAPTER 8 - CHAPTER 8 Valuation and Characteristics of...

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