Lecture 25 - Business Finance(ACC501 Lesson 25 Review of...

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132 Business Finance (ACC501) Lesson 25 Review of the Previous Lecture Zero Growth Stocks Constant Growth Stocks Non-constant Growth Stocks Components of Required Return Common Stock Features Topics under Discussion Preferred Stock Features The Stock Market Net Present Value Estimating NPV Using NPV Preferred Stock Features Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights. Preference means only that the holders of the preferred shares must receive a dividend before holders if common shares are entitled to anything. Stated Value Preferred shares have stated liquidating value Cash dividend is described in terms of dollars per share. Accumulation of Dividend A preferred dividend is not like interest on a bond. The directors may decide not to pay the dividends on preferred stock irrespective of the net income of company. Dividends on preferred stock may be either cumulative or non-cumulative; most are cumulative If preferred stocks are cumulative and are not paid in a particular year, they will be carried forward as an arrearage. Unpaid preferred dividends are not debts of the firm. Directors can defer the preferred dividend indefinitely. However, in this scenario, common stockholders must also forego dividends. Sometimes these delayed payments are compensated by voting rights.
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133 Is Preferred Stock Debt or Equity? Preferred shareholders are only entitled to receive a stated dividend and they are only entitled to the stated value of their shares Preferred stocks hold credit ratings much like bonds These are sometimes convertible into common stock and are often callable.
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