Preferred Stock - Business Finance - ثاني ثانوي

. Link digitalesp 7.4 Preferred Stock www.iem.edu.sa The shares in a company that are owned by people who have the right to receive part of the company's profits before the holders of common stock Key Term Preferred stock Preferred stock is a class of equity but is more like debt than common stock since it pays a fixed dividend return that may accumulate if it is not paid. Preferred stock gives holders a priority to receive a predetermined percentage of a company's profits, and priority over holders of common stock in obtaining rights in the event of a company's liquidation. Like common stock, preferred stock can be perpetual so the company never has to retire it, but the company can call back the preferred shares. Unlike common stockholders, preferred stock does not allow holders to vote. Issuing preferred stock provides equity and is included in share capital instead of being included as debt on a balance sheet. Like many companies, Fahd's company has not issued preferred stock, although the company's articles of association allow for the issuance of preferred stock under Saudi Companies Law articles. ■ Issuing preferred stock can provide additional capital for the company but will lock in a percentage of net profits to be paid to preferred stockholders. • If Fahd's company fails to pay the specified percentage of their company's net profits in a given year, under the Saudi Companies Law, no dividends can be distributed for the following years except after payment of the percentage specified to holders of preferred shares. • Fahd's companies don't have to retire the preferred shares like most debt, therefore, their preferred shares will often be purchased by investment firms rather than individuals. 288 Business Finance 7.4a Analysis of Preferred Stock Because preferred stock is an income-producing investment for investors, Fahd's analysis is primarily concerned with the capacity of his company to meet the dividend payments. Although dividends must ultimately be

P related to current earnings and the company's future earning capacity, preferred dividends are paid from cash. Even if the company is operating at a loss, it may still be able to pay dividends to the preferred stockholders if it has sufficient cash. In fact, cash dividends might be paid despite the earnings deficit to indicate that the losses are expected to be temporary and that the company is financially strong. Why might it be important reputationally for a company to keep paying dividends even during a less-making war? 4105811 8041501 4204205 M+ 7814581 1498523 686853 8546404 3544004 153305 9 9545351 8 + 3525550 7154700 4205221 8061012 184058 2104 B 4574/03 249163 2147054 DIVIDENDS 8014450 7814581 4200 $346404 CO 156 1485249 1621510 6847164 9686447 4024521 1544148 8267114 1524573 747807 40540 846 7027 289 71 4 432 met

P 200 Business Finance Exercises Choose the correct answer. 1. Preferred stock dividends are paid after interest but before dividends to common stock. True/False 2. Common features of preferred stock include: a. variable dividends b. skip dividends c. adjustable dividends d. fixed dividends 3. Dividends can be paid to the preferred shareholders even if the company is operating at a loss. True/False