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Corporate stocks
Stock Financing- when shares of stock are sold to raise funds for the long term
financing requirements of the firm, this activity is referred to as stock financing.
Provisions of Preferred Stock. Certain provisions are incorporated in the preferred stock
which makes them distinguishable from each subclassification and from common stock.
The provision refer to the following:
● claim to dividends
● voting rights
● subscription rights
● callability
● convertibility
● participation; and
● classes
Claim to Dividends
The preferred stock has a basic advantage of prior claim to dividends, preferred stocks
may be classified into two: (1) cumulative and (2) non- cumulative.
Voting Rights
Preferred stockholders, in general, do not have the right to vote. There are instances
when preferred stockholders may vote.
Subscription Rights
In case of additional issues of stock, some preferred stockholders have the right to
subscribe, while others do not have the same right.
1. Those with pre-emptive right; and
2. Those without pre-emptive right.
Callability
Preferred stocks may also be classified as either;
● Callable
● Non-callable
Convertibility
Convertibility is just another way of classifying preferred stocks. As such, preferred
stocks may either be:
● Convertible; or
● Non-convertible
Participation
Preferred stocks may also have the additional feature of participating or sharing with the
common stock in additional dividends after the preferred stock have been credited with
its regular dividend. As such, preferred stocks may be further classified as follows:
● Participating; and
● Non-participating
●
Classes
Preferred stock may also be issued in different classes for different purposes. For
instance, a preferred share may be identified as class A or B which could mean class A
has certain features that class B does not have.
Advantages of the Preferred Stock Issue
● The claim of preferred stockholders on corporate earnings is usually limited to a
specific amount or rate per share.
● Preferred stockholders are owners and they have no claim that can force the
corporation into bankruptcy proceedings for non-payment of dividends. On the
other hand, when interest on a corporate debt is not paid, the creditors may start
legal to require payment.
Disadvantages of the Preferred Stock Issue
● Dividends are fixed payments and it increases the financial risk of the firm
resulting to increases in the cost of all financing.
● Dividends are not deductible as a tax expense, unlike the interest paid on debt.
Treasury Stock
The major use of treasury stock consists of the following:
● Stock options
● Acquisitions
● Investments
● Stock splits
● Stock dividends; and
● Conversion of convertible securities including warrants