Question

Explain the two basic types of preffered stocks

Answer 1

Preferred stock is the type of security that has a greater right to the assets and earnings of a corporation. The two basic types of preferred stocks may be classified into:-

1.) Cumulative Preferred Stock:-

The Cumulative preferred stock is a type of stock where the dividends are cumuative. Any dividends not paid in a year will be eligible for repayment during the next year and so on until the payment of such accumulated dividends are completed. Further, the preferred dividends must be cleared out before paying any dividends to the common stockholders.

Example:- A company has 10% Preferred Shares of $100,000. During 2015, the company does not pay dividends on its preferred shares. The $10,000 (10% of $100,000) is carried forward to 2016 and will be paid along with the 2016 dividend.

2.) Participating Preferred stock

The Participating preferred stock is a stock that pays both Preferred and participating dividend to the shareholders. These preferred stockholders , in addition , to claiming a share in the fixed dividend are also entitled to additional dividend on the profits of the company similar to the common shareholders. Additionally, at the time of liquidation, Participating Preferred stockholders also have liquidation preferences over the common stockholders. The participating preferred stock ranks below debt in the event of liquidation.

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