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Chapter 8 FIN - Chapter 8 Preferred Stock It is a hybrid...

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Chapter 8 Preferred Stock It is a hybrid security with characteristics of both common stock and bonds. Preferred stock is similar to common stock in that it has no fixed maturity date, the nonpayment of dividends does not bring on bankruptcy, and dividends are not deductible for tax purposes. Preferred stock is similar to bonds in that dividends are limited in the amount. Traits of Preferred Stock - Multiple series of preferred stock - Preferred stock’s claim on assets and income - Cumulative dividends o Cumulative feature: a requirement that all past, unpaid preferred stock dividends be paid before any common stock dividends are declared. - Protective provisions o Provisions for preferred stock that protects the investor’s interest. The provisions generally allow for voting in the event of nonpayment of dividends, or they restrict the payment of common stock dividends if sinking-fund payments are not met or if the firm is in financial difficulty. - Convertibility o Convertible preferred stock: preferred shares that can be converted into a predetermined number of shares of common stock, if investors so choose - Retirement provisions o Call provision: a provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods o Sinking fund provision: a protective provision that requires
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