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Q: Accounting~preferred stock ( Answered 5 out of 5 stars,   0 Comments )
Question  
Subject: Accounting~preferred stock
Category: Business and Money > Accounting
Asked by: aprilchiang-ga
List Price: $5.00
Posted: 03 Dec 2002 12:27 PST
Expires: 02 Jan 2003 12:27 PST
Question ID: 118599
How preferred stock is a hybrid between common stock and debt and
discuss the elements of preferred stock that make it comparable to
debt.
Answer  
Subject: Re: Accounting~preferred stock
Answered By: vercingatorix-ga on 03 Dec 2002 12:56 PST
Rated:5 out of 5 stars
 
Preferred stock is more of a debt instrument than an equity
instrument. It is often called a hybrid, but that's not really
accurate. Preferreds trade on stock exchanges, so they're often more
liquid than bonds. They also tend to trade around $25 per share, so
they're more accessible to individual investors than bonds, which tend
to trade in $1,000 increments.

Yet, they lack the fundamental characteristics of stock investments.
Preferred shareholders rarely have voting rights, nor are they
entitled to a share of the company's earnings, as common stockholders
are. Basically, preferreds are bonds available at a lower per-unit
price point that can be traded like stocks.

Some preferred are actually hybrids. Examples include convertibles,
which can be converted into common stock when certain conditions are
met, and a few other classes of convertibles that allow for extra
dividends when the company is more profitable or provide limited
voting rights. Preferreds are like bonds, in that the issuer can
structure them in many different ways to accomplish a number of goals.

But the basic preferred stock is pretty much a debt instrument.

Here are some facts about preferred stocks:
* They pay a fixed interest payment, just like bonds.
* In the event of bankruptcy, they are senior to common stock in their
claim on company assets, but subordinate to bonds. Here's a scenario:
Say the assets of bankrupt Company X are liquidated for $50 million.
Further say that there are $40 million in bonds outstanding, as well
as a number of preferred and common stockholders. Theoretically, the
bondholders would all be made whole, and the remaining $10 million
would be distributed to preferred stockholders while the common
stockholders get nothing.
* Most preferred issues are callable, meaning that the company that
issued the stock can buy it back at fixed times and prices.
* Like bonds, preferreds tend to move with interest rates. They go up
when rates fall and fall when rates go up.
* Some preferred stock has a maturity data, and is redeemed at par on
that date. Some is perpetual, which suggests the holder could receive
dividends forever.
* Holders of preferred stock rarely share in the potential for strong
capital gains in the event of company growth, as common stockholders
do. Because these shares are debt investments at heart, buyers of
preferreds should look at the issuing company like bond investors, not
stock investors. Liquidity, debt structure, cash flow, and credit
ratings are probably more important than factors like market share,
new products, and operational efficiency.
aprilchiang-ga rated this answer:5 out of 5 stars and gave an additional tip of: $3.00
very great and professional. thanks a lot

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