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Module 6: Chapter 12 & 13Common Stock:oAll classes of stock are designated as either common stockor preferred stock. oThese come with different financial benefits and provide different rights regarding the governance of thecorporation. oWhen a corporation is formed, a single class of stock, known as common stock, is usually issued. oCorporations may later find that there are advantages to issuing one or more additional classes of stock with varying rights and priorities. Stock with certain preferences (rights) over common stock is called preferred stock.oThe primary rights for owners of common stockare: Voting in the election of the board of directors. You will recall that the board controls the operating and financial policies of the company. Sharing in the profits and dividends of the company. Stock appreciation: The value of the stock increases above the price initially paid o(Of course, it is also possible that the stocks’ value decreases if the company is unprofitable – this is a risk of owning stock). Dividends: Dividends are payments to a company’s shareholders from earnings. These payments are usually in the form of cash, butnon-cash assets and stock can also be given as dividends. oPayment of dividends to common shareholders, however, depends on a company’s alternatives. Preferred Stock:oPreferred stockgenerally pays a regular dividend. oPreferred stock is a less riskyinvestment than common stock. oPreferred shareholders also receive priority over common shareholders in the payment of dividends and the distribution of assets in the event of liquidation. oThe term preferred stockis somewhat misleading because it gives the impression that preferred stock is better than common stock. Preferred stockisn’t better – it’s different. Preferred stockholdersgive up many of the rights of ownership in exchange for some of the protection enjoyed by creditors. oRights of ownership given upby preferred stockholders are: Voting– In most cases, preferred stockholders are not allowed to vote for the board of directors.Sharing in success – The cash dividends received by preferred stockholders are usually fixed in amount. Therefore, if the company does exceptionally well, preferred stockholders do not get to share in the success. Preferred dividend preferences:oPreferred dividend preferences can take threeforms:1. Current dividend preference2. Cumulative dividend preference3. Participating dividend preferenceCurrent dividend preference:oPreferred stockalwayshas a current dividend preference, which provides that current dividends must bepaid to preferred stockholders before any dividends are paid to common stockholders. oHowever, the current dividend preference does not guarantee payment of preferred dividends.