Preferred Stock

Definition

Preferred stock is a class of ownership in a corporation that provides shareholders with a fixed dividend before any dividends are paid to common stockholders. This type of stock typically has priority over common stock in the event of liquidation and can sometimes carry additional rights, such as conversion to common shares or cumulative dividends. Its features make it an attractive option for investors seeking stable income, especially during cross-border mergers and acquisitions where financing options can be complex.

5 Must Know Facts For Your Next Test

1. Preferred stockholders have a higher claim on assets than common stockholders, which makes it less risky for investors during a merger or acquisition.
2. In many cases, preferred stocks come with fixed dividend rates that can provide a reliable source of income, especially appealing in volatile markets.
3. Some preferred stocks are cumulative, meaning that if the company misses a dividend payment, it must pay those owed to preferred shareholders before any payments are made to common shareholders.
4. Preferred stock may also include redemption features, allowing companies to buy back shares at certain prices or times, which can influence their appeal in cross-border financing scenarios.
5. Investors may prefer these stocks in cross-border mergers and acquisitions because they can provide more stability compared to common stock while still participating in potential equity upside.

Review Questions

• How does preferred stock provide an advantage to investors during cross-border mergers and acquisitions compared to common stock?
  • Preferred stock provides advantages during cross-border mergers and acquisitions as it offers fixed dividends and priority over common stock in asset claims. This means that in case of financial distress or liquidation, preferred shareholders are more likely to receive their due payments before common shareholders. Additionally, the stability of dividends from preferred stock can make it an attractive investment option for those seeking consistent income amidst the uncertainties associated with cross-border deals.
• Discuss how the characteristics of preferred stock can impact the financing decisions of companies engaged in cross-border mergers and acquisitions.
  • The characteristics of preferred stock, such as fixed dividends and priority claims, influence companies' financing decisions by providing a more stable and less risky option for raising capital. When pursuing cross-border mergers and acquisitions, companies may choose to issue preferred shares to attract conservative investors looking for reliable returns. This helps mitigate risks associated with fluctuating market conditions while allowing firms to preserve cash flow for operational needs post-acquisition.
• Evaluate the implications of cumulative preferred stock in the context of financial health for companies involved in international acquisitions.
  • Cumulative preferred stock has significant implications for the financial health of companies engaged in international acquisitions. If a company faces financial challenges and cannot meet dividend obligations, cumulative features ensure that these missed payments accumulate and must be paid later. This can create pressure on cash flow management post-acquisition as companies prioritize settling these debts before distributing profits to common shareholders. The obligation to fulfill these cumulative dividends can affect strategic decisions and overall financial flexibility as firms navigate complex international markets.

Related terms

Common Stock: Common stock is the most basic form of ownership in a company, providing shareholders with voting rights and residual claims on assets after all debts and preferred stockholders have been paid.

Dividends: Dividends are payments made by a corporation to its shareholders, usually in the form of cash or additional shares, representing a portion of the company's profits.

Convertible Preferred Stock: Convertible preferred stock is a type of preferred stock that gives holders the option to convert their shares into a specified number of common shares, often at predetermined terms.