Preferred stock differs from common stock in that preferred stock:
Preferred stock always receives a stated interest payment if the company is solvent, but they are subject to being called. Bondholders have first call on payment. Common stock dividends are at the discretiuon of management, and may be zero.
stock has a required return of 10%. The stocks divided yield is 6%. what is the dividend the fim is expected to pay in one year if the current stock prioce is $40
To understand the difference between preferred stock and common stock, let's break down the key characteristics of preferred stock:
1. Stated interest payment: Preferred stockholders have a fixed dividend or interest payment that they receive, usually expressed as a percentage of their original investment. This payment is set at the time of issuance and remains constant unless the terms of the stock are modified.
2. Solvency: If the company is solvent and has sufficient profits or reserves, it is obligated to make the stated interest payment to preferred stockholders. In other words, preferred stockholders have priority in receiving dividends over common stockholders.
3. Callability: Preferred stock has a call feature, which means the issuing company has the right to buy back or redeem the shares from preferred stockholders at a specified price and time. This allows the company flexibility to retire the stock or refinance at more favorable terms.
Now, let's consider the characteristics of common stock as a point of comparison:
1. Dividends discretion: Unlike preferred stock, common stockholders do not have a fixed interest payment. The dividends for common stock are at the discretion of the company's management and can vary based on the company's performance and profitability. There may be periods when common stockholders receive no dividends at all if the company decides not to distribute any profits.
2. Bondholder priority: In case of liquidation, bondholders have the first claim on the company's assets and payment. Preferred stockholders have higher priority than common stockholders but lower than bondholders. This means that in the event of bankruptcy or liquidation, bondholders are paid first, followed by preferred stockholders, and finally common stockholders.
To summarize, preferred stock differs from common stock in that preferred stockholders receive a fixed interest payment (dividend) if the company is solvent, whereas common stockholders do not have a guaranteed dividend and rely on the discretion of management. Additionally, preferred stock is subject to being called by the issuer, while common stock does not have a call feature.