Question

In: Finance

In what respect is preferred stock similar to bonds, and in what respect is it similar...

In what respect is preferred stock similar to bonds, and in what respect is it similar to common stock? Please use examples to better demonstrate your explanations. I need the examples

Solutions

Expert Solution

Preferred Stock is a category and type of ownership of a company which ranks above common stock and just below debt in its claim over the company's earnings and assets. This essentially implies that company's net income is first apportioned among debtholders, followed by the preferred stockholder and then finally the common stockholder.

A preferred stock is similar to debt in the sense that it pays a constant stream of income to its holders in the form of an annual dividend. This dividend could be fixed, based on a reference rate (such as the LIBOR), etc. The dividend is always calculated as a fixed or stated % of the preferred stock's par value which is similar to bond's periodic coupon payment calculations. Further, as preferred stock dividends are fixed (or based on benchmark which is fixed), their prices behave more like bonds (fixed income security) and less like common stock.

A point of similarity between common stock and preferred stock is that both represent a form of partial claim on the firm through a kind of equity ownership. The common stockholders, however, have voting rights, variable dividends but priority lower than preferred stockholders with respect to claim on the company's earnings and assets.


Related Solutions

In what respect is preferred stock similar to bonds, and in what respect is it simi-...
In what respect is preferred stock similar to bonds, and in what respect is it simi- lar to common stock?
Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences?...
Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences? Are bonds and mandatorily redeemable stock reported any different in the financial statement? Why?
Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences?...
Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences? Are bonds and mandatorily redeemable stock reported any difference in the financial statement? Why?
Pick ONE: Discuss the similarities and differences of preferred stock, common stock and corporate bonds. What...
Pick ONE: Discuss the similarities and differences of preferred stock, common stock and corporate bonds. What are present value and future value? How are they calculated? What do they represent? Why use them? What is the Time Value of Money? Discuss three reasons supporting why this is true.
Green Forest Banking has issued bonds, common stock, and preferred stock. The YTM for the bonds...
Green Forest Banking has issued bonds, common stock, and preferred stock. The YTM for the bonds is 10.9 percent and the expected annual return for the common stock is 17.3 percent. Which of the following assertions about the expected annual return for the preferred stock issued by Green Forest Banking is most likely to be true? A) The expected annual return for the preferred stock is 17.3 percent B) The expected annual return for the preferred stock is 10.9 percent...
“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it...
“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it correct,explain in detail
Company finance structure is 25% bonds, 10% preferred stock, and 75% common stock, the bonds each...
Company finance structure is 25% bonds, 10% preferred stock, and 75% common stock, the bonds each have a face value of $1,000, selling at a discount of $35 today with maturity in 10 years, annual coupon interest of 8% and flotation cost of 2 1/2%, companys tax rate is 34%, preferred stock has a 7% annual dividend and par at $100 which can be sold today for $85, underwriters fee for the sale would be $2 per share, new common...
a) What are the principal differences between common stock and preferred stock? b) Preferred stock may...
a) What are the principal differences between common stock and preferred stock? b) Preferred stock may be cumulative. Explain this feature. c) How are dividends in arrears presented in the financial statements? Please provide theory and your own explanation or examples.
Explain the differences between Preferred Stock and Common Stock.  What is the formula to value preferred...
Explain the differences between Preferred Stock and Common Stock.  What is the formula to value preferred stock? ABC Company preferred stock offers a dividend payment of $6 per year. Investors require a rate of return of 6%. What should be the price or value of this preferred stock?
We should discuss Preferred Stock. What makes stock common or preferred? It is the preferences on...
We should discuss Preferred Stock. What makes stock common or preferred? It is the preferences on the stock that make that class of stock preferred. Most preferred stocks prohibit the firm from paying common dividends when the preferred is in arrears;usually cumulative up to a limit. Some preferred stock is perpetual, but most new issues have sinking fund or call provisions which limit maturities. Preferred stock has no voting rights, but may require companies to place preferred stockholders on the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT