Preferred stock is not always attractive to investors because they are not

Preferred stock is not always attractive to investors

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the stock they have issued. Preferred stock is not always attractive to investors because they are not always guaranteed a dividend payment. Also, the issuance of this stock could throw up a red flag to current investors. Smaller, weaker companies typically use this approach because it is the only way to raise capital. Preferred stock is costly to a company (Gleeson, 2017). Finally, by issuing convertible preferred stock, Peyton is risking changing the earnings per share for common stockholders. If all of the $100-par convertible stock is sold, the purchasers could exercise the right to convert. By doing this, it would change the dividend that common stockholders would receive for their investments (Wahlan, Jones, and Pagach, 2017). This could be potentially harmful. A second consideration for Peyton to raise capital is that they issue $1,000,000 worth of 8% convertible bonds. Similar to preferred stock, they can also be converted into common stock. This could be an attractive option for investors as opposed to stock. With stock, if a company’s value falls to $0, then the stockholder loses everything. However, with a bond they are guaranteed the par value of the bonds regardless (Scatizzi, 2009). Also, issuing convertible bonds does not require a valuation of the company, so it is a cheaper means of raising capital. These 3
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convertible bonds also are not very dilutive so they can be converted at higher share prices (Yum, 2017). Convertible bonds are also a lower-risk option for Peyton but is not so conservative for those buying the bonds. Those who purchase the convertible bonds will benefit as the value of the company increases (Wahlan, Jones, and Pagach, 2017). The third option is to combine both the first and second options. It would most likely be in the better interest of the company to use one method or the other. It is important to note that, in terms of the preferred stock, the capital raised will only be equivalent to the stocks that were sold. If convertible bonds are also an option, investors may be more likely to act on them than they would be preferred stock. This would mean that Peyton Approved would just have move stock outstanding than anticipated. Also, while the equity of the company could increase, the earnings per share of the company could decrease. This would have a negative impact on the shareholders. If shareholders lose money, they are more likely to not want to keep their investments in the company. Put simply, earnings per share represent the amount of the company’s net income that is associated with each share of common stock. This amount helps investors calculate a return on investment as well as the risk of investment in a certain company. When we speak of convertible preferred stock and convertible bonds being potentially dilutive, earnings per share is the item which will be diluted. This is because when preferred stock or bonds are converted, they are
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