This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ting
ownership of shares of a foreign company’s stock held on deposit by the U.S.
bank in the foreign market. Because ADRs are issued, in dollars, by a U.S. bank
to U.S. investors, they are subject to U.S. securities laws. Yet they still give
investors the opportunity to diversify their portfolios internationally. CHAPTER 7 Stock Valuation 313 Preferred Stock
par-value preferred stock
Preferred stock with a stated
face value that is used with the
specified dividend percentage to
determine the annual dollar
no-par preferred stock
Preferred stock with no stated
face value but with a stated
annual dollar dividend. Preferred stock gives its holders certain privileges that make them senior to common stockholders. Preferred stockholders are promised a fixed periodic dividend,
which is stated either as a percentage or as a dollar amount. How the dividend is
specified depends on whether the preferred stock has a par value, which, as in
common stock, is a relatively useless stated value established for legal purposes.
Par-value preferred stock has a stated face value, and its annual dividend is specified as a percentage of this value. No-par preferred stock has no stated face value,
but its annual dividend is stated in dollars. Preferred stock is most often issued by
public utilities, by acquiring firms in merger transactions, and by firms that are
experiencing losses and need additional financing. Basic Rights of Preferred Stockholders
The basic rights of preferred stockholders are somewhat more favorable than the
rights of common stockholders. Preferred stock is often considered quasi-debt
because, much like interest on debt, it specifies a fixed periodic payment (dividend). Of course, as ownership, preferred stock is unlike debt in that it has no
maturity date. Because they have a fixed claim on the firm’s income that takes
precedence over the claim of common stockholders, preferred stockholders are
exposed to less risk. They are consequently not normally given a voting right.
Preferred stockholders have preference over common stockholders in the distribution of earnings. If the stated preferred stock dividend is “passed” (not paid)
by the board of directors, the payment of dividends to common stockholders is
prohibited. It is this preference in dividend distribution that makes common
stockholders the true risk takers.
Preferred stockholders are also usually given preference over common stockholders in the liquidation of assets in a legally bankrupt firm, although they must
“stand in line” behind creditors. The amount of the claim of preferred stockholders in liquidation is normally equal to the par or stated value of the preferred stock. Features of Preferred Stock
A number of features are generally included as part of a preferred stock issue.
These features, along with the stock’s par value, the amount of dividend payments, the dividend payment dates, and any restrictive covenants, are specified in
an agreement similar to a bond indenture. cumulative preferred stock
Preferred stock for which all
passed (unpaid) dividends in
arrears, along w...
View Full Document