Question

Explain these preferred stock characteristics:

a. Accumulation of dividends

b. Participation in excess of stated dividend rate

c. Convertibility into common stock

d. Callability by the corporation

e. Preference in liquidation

Answer 1

a.

With the cumulative feature, if a corporation fails to declare the usual dividend on the cumulative preferred stock, the amount of passed dividends becomes dividends in arrears.  Common stockholders cannot be paid any dividends until the preferred dividends in arrears and the current preferred dividends are paid. 

 

b.

When preferred stock is participating, preferred stockholders may receive an extra dividend beyond the stated rate.  The terms of the participation depend on the terms included with the stock certificates. 

 

c.

Convertible preferred stock contains a provision that allows the preferred stockholders, at their option, to convert the share of preferred stock at a specific exchange ratio into another security of the corporation. 

 

d.

Callable preferred stock may be retired (recalled) by the corporation at its option. 

 

e.

Should the corporation liquidate, the preferred stockholders normally have preference to have their claims settled prior to any payment to common stockholders.