Preferred stockholders

Preferred stock is often used as an alternative to debt when companies do not wish to issue additional common stock or to incur the fixed interest charges required to finance debt. Preferred stockholders are not normally allowed to vote for the board of direciors. They have the right to receive fixed amounts of dividends before common stockholders are paid any dividends. However, a company does not have to pay dividends. The board of directors may decide to pay small or no dividends in a particular year. Holders of cumulative preferred stock... 

Common stockholders have a right to the residual assets of a company in the event of dissolution or liquidation but only after all the creditors and then any liabihties to the preferred stockholders have been paid. The larger the proportion of debt financing in a company, the smaller the amount the common stockholders are likely to receive if the company is liqiiidated. 

In the case of preferred stock, the par value has more meaning than with common stock, since it is the amount due preferred stockholders if the company goes into liquidation, provided that this is a condition of issue. 

The profit of 10 percent, indicated by ratio 3 in Table 9-26, will be reduced by any dividend due to preferred stockholders, because such payments are not part of fixed-debt expenses the residue is shared among the ordinaiy stockholders. If all the long-term debts were in redeemable 6 percent preferred shares, then (from ratio 3) the net annual profit (aftertax) is Av.vp = 0.10(0.40 A ), or 0.04 A. Interest due on preferred shares is 0.06(0.12 As), or 0.0072 As- Therefore, the earnings for the ordinaiy shares are... 

Preferred stock Stock having claims that it commands over common stock, with the preference related to dividends. The holders of such stock receive dividends before any distribution is made to common stockholders. Preferred stockholders usually do not have voting rights as common stockholders do. 

Preferred stock has a preference over other shares regarding dividends and/or the distribution of assets. Some preferred stock is called cumulative, which means that if in any given year the company does not pay dividends, the unpaid dividends accumulate, and when these obligations are paid, the holders receive of this stock dividends before the holders of common stock. Preferred stockholders do not normally have a voice in company affairs or voting rights unless the company fails to pay them dividends. The preferred stock is carried on the books at a stated par value. 

What would happen if a large company whose policy is to pay out half its income to stockholders suddenly reversed the policy and channeled all profits back into the business What might be the reaction of common and preferred stockholders Should this company do this, and if not, why not ... 

Dividends are a distribution of a portion of a company s earnings to its shareholders. Dividends are paid to preferred stockholders (preferred dividends) first, then to common stock holders. Management communicates to preferred stock holders with statements such as Preferred Stock Dividends Declared, that the company intends to pay them a certain amount of money for each preferred share they own. 

Once dividends are paid out to preferred stockholders, the remaining is net income available to common stockholders. To determine the amount of net income that is available to common stock holders, we must first remove any income that is due to preferred stockholders. 

As an example of dividends being paid out to preferred stockholders first, see the income statement, Table 4.3, Note 1 PepsiCo s dividends paid to preferred stockholders and redemption premium totaled 8M period ending 2013. 6,740 - 8 = 6,732. Thus, 6,732 is net income available to common stockholders. 

The difference between equity financing and debt financing is not always clear-cut. For example, preferred stock can be classified as stockholders equity or debt, depending on who is doing the financial analysis. 

Equity Financing Typically, the company balance sheet will show the stockholders equity and list the preferred stock, common stock, and retained earnings as in Table 9-23. 

Both common and preferred stocks normally have a par, or nominal, value. In the case of common stock, the market value at the time of issue usually differs from the par value. Stock can be issued either at a premium or at a discount, depending on prevailing economic conditions and the strength of the company. The difference between the actual amount paid and the par value is listed in the stockholders -equity section of the balance sheet, as shown in Table 9-23. The issuance of stock at a premium or a discount is done to protect existing stockholders. 

A financial analyst looking at a company from a potential common stockholders point of view is hkely to classify preferred stock as debt. In contrast, bondholders and general creditors are likely to regard preferred stock as additional eqmty. Since preferred stock is a hybrid type of security, it may be issued by a company whose management is divided over the question of whether to use equity or debt to finance additional assets. However, preferred stock does have the disadvantage that the dividends are not allowed as a tax-deductible expense. 

Stockholders equity is the interest that all stockholders have in a company and is a liability with respect to the company. This category includes preferred and common. stock as well as additional paid-in capital (the amount that stockholders paid above the par value of the stock) and retained earnings. These are earnings from accumulated profit that a company earns and are used for reinvestment in the company. The sum of these items is the. stockholders equity. 

The cost of capital is what it costs a company to borrow money from all sources, such as loans, bonds, and preferred and common stock. It is an important consideration in determining a company s minimum acceptable rate of return on an investment. A company must make more than the cost of capital to pay its debts and make a profit. From profits, a company pays dividends to the stockholders. If a company ignores the cost of capital to increase dividends to the stockholders, then management is not meeting its obligations to pay off outstanding debts. 

The cost of new capital obtained from bonds, loans, or preferred stock can be determined directly from the stated interest or dividend rate, adjusted for income taxes. However, the cost of new capital obtained from the issue of common stock is not so obvious, and some basis must be set for determining this cost. Probably the fairest basis is to consider the viewpoint of existing holders of common stock. If new common stock is issued, its percent return should be at least as much as that obtained from the old common stock otherwise, the existing stockholders would receive a lower return after the issue of the new stock. Therefore, from the viewpoint of the existing stockholders, the cost of new common stock is the present rate of common-stock earnings. 

Net income - Preferred dividends Average stockholder equity... 

Total Stockholders Equity. The total stockholders equity is the sum of the preferred stock, common stock, capital surplus, and accumulated retained earnings. 

To obtain the value of the retained earnings, the company starts at the beginning of a yeai with the previous year s balance. To that figure the net profit for the year after taxes is added. The dividends paid to the preferred and common stockholders are then subtracted. The result is the retained earnings at the end of the year. 

The stockholders equity is the interest that stockholders have in the business and is the net worth of the company, namely, total assets minus total liabilities. The total stockholders equity is the sum of the preferred stock, common stock capital surplus, and accumulated retained earnings. 

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