Page 209 - Finance for Non-Financial Managers
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                                      Finance for Non-Financial Managers
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                               terms of percent of face value or dollars per share.
                                   Preferred shares are indeed a separate class of stock, with
                               privileges and restrictions different from common stock. And
                               they’re called preferred shares for good reason. When the
                               board of directors decides to declare a dividend to the share-
                               holders, the preferred shareholders must get their entire divi-
                               dend, based on the stated dividend rate, before any dividends
                               can be paid to the common shareholders. In some cases, the
                               preferred shares are also cumulative, meaning that dividends
                                                                   not paid in one year accu-
                                         Preferred stock Equity    mulate as obligations of
                                         ownership in a corporation  the company and must be
                                         that entitles the stockhold-  paid up in full before any
                                ers to a specific dividend before any  common stock dividends
                                dividends are paid on common stock.  may be paid. For some
                                In the event of liquidation, preferred  companies, that can mean
                                stockholders have rights to corporate
                                assets after bondholders and holders  years of paying preferred
                                of other debt but before common    dividends in full while giv-
                                stockholders.                      ing common stockholders
                                                                   little or nothing.
                                   In the event of the dissolution of a company with both pre-
                               ferred and common shares outstanding, the cash raised from
                               liquidating the assets is first used to repay all creditors. What’s
                               left goes to the stockholders, with the preferred stockholders
                               coming first. If there’s enough money to satisfy 100% of the pre-
                               ferred stockholders’ claims, then the balance goes to the com-
                               mon stockholders. If there’s not enough cash to satisfy both
                               groups of owners, there’s no pro-rata sharing between them.
                               The preferred shareholders get all of theirs and the common
                               shareholders get what is left, which may be nothing.
                                   That, simply, is the meaning of the word “preferred.”
                                   So why doesn’t every investor buy only preferred stock?
                               The downside of preferred stock ownership is the limitation on
                               participation in the extreme good fortune of the company. If a
                               company does very well, it can declare a very handsome divi-
                               dend for its common stockholders or give them additional
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