CHAPTER 9 - Stocks and Their Valuation Types of Equity:...

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Stocks and Their Valuation Types of Equity: Common Stock Preferred Stock
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Preferred Stock Hybrid Security – debt and equity Like debt: Fixed payment Has priority of claim over common stock Like Equity: Payment not tax deductible to firm Payment may be “skipped” with causing default (Usually) has no maturity
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Preferred Stock Characteristics Par Value – limit of claim Fixed (stated) dividend – as % of par or fixed $ amount (Usually) cumulative No voting rights (normally) May be callable
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Preferred Stock Valuation (Most) preferred stock has no maturity. Pays equal periodic payments forever. This is a Perpetuity PV = Pmt/RRR (vs. cost) Yield = Pmt/Price (vs. RRR)
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Recent Trends in Preferred Stock Many issues now contain “Terms and Conditions” (restrictions) like debt issues Sinking fund provisions Convertibility Maturity Date – if preferred stock has a maturity date, it is not a perpetuity, but an annuity with a repayment at end. Just like bond. Valuation done like bond
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CHAPTER 9 - Stocks and Their Valuation Types of Equity:...

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