Wk 4, DQ 2 - Why might a company prefer the use of...

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What is the difference between Preferred Stock and Common Stock? Both Common and Preferred stock mean that the holder(s) of stock have a piece of ownership in the organization which the stock is from. A difference is that holders of Common Stock have voting privileges and holders of Preferred Stock do not have voting privileges. Another difference is that Preferred Stock holders have fixed dividends from the organization, and Common Stock holders are at the mercy of the decisions of the board of directors as to whether they receive dividends. Holders of Common Stock expect to make a profit through capital gains, meaning an increase in the value of the stock. Holders of Preferred Stocks are more interested in obtaining a constant cash flow via dividends.
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Unformatted text preview: Why might a company prefer the use of Preferred Stock over Common for long term financing? First and foremost, the terms for Preferred Stock are negotiated between the investor and the organization. Common Stock is normally issued to founder(s) and employees (through stock options) and Preferred Stock to investors. Preferred Stock does not offer the higher profit potential as Common Stock, indicating that the organization can better use the cash from investors. Additionally, the price of Preferred Stock is based on interest rate levels and can go down when interest rates increase. If interest rates decrease, the price of Preferred Stock increase. Additionally, Preferred Stock holders do not have voting rights....
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This note was uploaded on 08/21/2010 for the course FIN FIN370 taught by Professor Mr.garcia during the Fall '09 term at DeVry Long Beach.

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