22.Preferred stocks technically have an unlimited life because they have no fixe
ID: 2782398 • Letter: 2
Question
22.Preferred stocks technically have an unlimited life because they have no fixed ________ _______, but they may be _______ by the issuer after a certain date.
23. Like bonds, preferreds are ______ to common stock. However, bonds have more seniority than preferreds. The seniority of preferreds applies to both the distribution of _______ ________ (as dividends) and the liquidation of proceeds in case of bankruptcy.
24.Preferreds pay dividends. These are fixed dividends, which can be either __________ or ___ _________ normally for the life of the stock, but they must be declared by the company's board of directors.
25.If a preferred stock is paying an annualized dividend of $1.75 and is currently trading in the market at $30, the current yield is: _____________%.
26.Most preferred stock is ______________, meaning that if the company withholds part, or all, of the expected dividends, these are considered dividends in arrears and must be paid before any other dividends.
27.IRS rules allow U.S. corporations that pay corporate income taxes to exclude 70% of the dividend income they receive from their taxable income. This is known as the ________ _______ ________, and it is the primary reason why investors in preferreds are primarily institutions.
28.There are a number of strong companies in stable industries that issue preferred stocks that pay dividends above ___________ ________ bonds.
Explanation / Answer
22. Preferred stocks technically have an unlimited life because they have no fixed maturity life, but they may be redeemed by the issuer after a certain date.
Just like equity shares, preferred stocks have no fixed maturity. It goes on till company exists. Whereas one of the features of preferred stocks is that they can be redeemed in future for premium at par. Company offers higher rates than markets rates for redemption.
23. Like bonds, preferreds are superior to common stock. However, bonds have more seniority than preferreds. The seniority of preferreds applies to both the distribution of Corporate earnings (as dividends) and the liquidation of proceeds in case of bankruptcy.
Preference shares always have first right for distribution of income generation. That’s why investor chooses preference shares over common stock. In case of earnings & liquidation, preference shares are the first to distribute the earnings.
24. Preferreds pay dividends. These are fixed dividends, which can be either reinvested or distributed normally for the life of the stock, but they must be declared by the company's board of directors.
Dividends distribution has an option whether to pay or reinvest in the company.
25. If a preferred stock is paying an annualized dividend of $1.75 and is currently trading in the market at $30, the current yield is 5.833 (1.75/30)%.
Yield is calculated as Annual dividend/current market price
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