Describe The Preferred Stock – First see Definition of Preferred Stock Capital, Another important tool for long term financing is preferred shares. Preference shares are those shares in which the owners of the company have priority in both the distribution of dividends and the return of capital at the time of liquidation. The owners of these shares make a profit from the transaction at a certain rate.
In this Article briefly discussed What is preferred share or preferred share capital? What is called Preferred Stock Capital?, What are the features of preferred share capital? What are the features of Preferred Stock Capital?, What are the benefits of preferred shares? What are the advantages of Preferred Stock? Or, describe the benefits of preferred share capital. Describe the advantages of Preferred Stock Capital? And Preferred shares have been combined with the worst features of ordinary shares and debts. Lets Strat –
Such shareholders are neither full owners nor creditors. In some cases they enjoy more benefits than the owners or creditors. Although they do not take any risks with the company. They cannot participate in company management. However, this does not apply to special circumstances. Although such shares are an important tool for long-term financing, it is safe to say that they are not widely used in our country.
Features of Preferred Stock Capital:
Features of Preferred Stock Capital Is An important source of long-term financing for an organization is preferred shares. It is a type of equity share consisting of debt and common share features. The position of the preferred shares in terms of claims and rights is before the ordinary shares but after the debentures, the owners of the preferred shares have such preference in terms of profit and liquidation.
From the point of view of bonds and common shares, preferred shares are considered as an investment of a hybrid or mixed or hybrid feature. Similar topics – Break – Even Point Analysis A to Z, Goal of the financial manager, What Is Bond? Discuss A to Z and, Advantages And Disadvantages Of Time Value of Money. Definition of Time Value of Money & Importance Of Time Value Of Money.
The features of Preferred shares:
1. Dividend: Preferred shareholders receive dividends like ordinary shareholders. But this dividend is fixed like the interest on the loan. However, the company does not pay any dividend if there is no profit.
2. Priority on dividend: In the case of dividend distribution, priority shareholders get more priority than ordinary shareholders. Prior shareholders must pay dividends before paying dividends.
3. Cumulative feature: One of the features of most preferred shares is that it has one year advance dividend to be paid in the next year. In this case, the company must first pay the outstanding dividend of the preferred shares before paying dividends on ordinary shares.
4. Participating feature: In the case of Participating feature and participation feature, the preferred shareholders get the opportunity to participate in the general profit of the company in addition to the fixed dividend. They share the remaining profits with ordinary shareholders after receiving a fixed dividend.
5. Equivalent (Par because the value of termination) is an equivalent of the preferred share. This price certainly has a significance. This is necessary in determining how much time is owed to priority shareholders. .
6. Priority on asset: In the case of property, the claim of the preference shareholders is settled after the claim of the creditors is settled from the money that will be recovered from the sale of the property held at the time of liquidation of the institution. The demands of ordinary shareholders are finally met.
7. Voting right: Usually preferred shareholders do not have the right to vote. But in special cases they can exercise the right to vote to select a certain number of directors. Such franchises are usually granted if the preferred share fails to pay dividends.
8. Fixed income: Preferred shareholders get a fixed income or profit. Their income is generally limited by the stated dividends.
9. Duration: There is no fixed repayment period for preferred shares like ordinary shares. However, it cannot be considered as a source of permanent financing.
10. Regulation on the company: Some restrictions are imposed on the company to ensure regular return of dividends to the preferred shareholders. Such as before paying dividends to shareholders. It is very important to maintain the current ratio and the amount of working capital.
Advantages of Preferred Stock Capital or Preferred Stock:
Advantages of Preferred Stock Capital or Preferred Stock The use of preferred shares has declined significantly lately. However, it has many advantages for various reasons. Which is discussed from the point of view of for organizations.
View point of an organization:
1. Since Planning has to bear a certain amount of cost every year, it does not cause problems in planning.
2. Fixed cost: In case of priority shares, the company bears only fixed cost. Certain portions of profits are paid to priority owners only.
3. Flexibility: Priority shares provide more flexibility to the institution than bonds. Dividends may not be mandatory in this case. Dividends can be suspended if there is no profit.
4. Leverage Company also takes advantage of leverage by using preferred shares. Earnings per share are usually higher than the cost of capital, which is an increase in earnings per share.
5. There is no final payment time for unpaid preference shares. It usually becomes unpaid.
6. Control: The issue of preferred shares due to lack of voting rights does not create any problem on the control of the company.
7. The higher the income potential of all organizations at higher profits, the more real profits the owner can make if they finance through preferred shares.
8. The company is in trouble for full financing as it has to repay the loan after a hassle-free period. This is not usually the case with preferred shares.
9. Avoid profit sharing: Financial managers avoid profit sharing by selling preferred shares.
10. Market Acceptance: When a company has common shares in the capital market, they are preferred over ordinary shareholders at the time of liquidation.
View point of Investor’s:
1. at the time of liquidation. This provides the investor with a reasonable fixed income.
2. Investors who are reluctant to take risks are interested in investing in such stocks.
3. In the United States, 75% of dividends earned on preferred shares are not taxable.
So many organizations can use it. Related topics – List of Careers in finance or Major Areas And Opportunities in Finance, What is the Science of Money Called and Who Is the Financial Manager?, History of Financial Management, What is Nature of Financial Management?.
Disadvantages of Preferred Stock:
Disadvantages of Preferred Stock There are some difficulties in financing a company through preferred shares. These difficulties are discussed below.
Disadvantages from the side of the company :
1. More Expenses One of the major disadvantages of preferred shares is that it is much more expensive than borrowed capital. This is because there is a tax or benefit on the interest on the bond but no tax benefit is available on the dividends of the mortgaged shares and in most cases the expenditure of the taxable loan fund is significantly less than the preferred shares.
2. Less Earning Per Share, If the funds raised through gradient shares earn less than the cost of capital, it reduces the earnings per share of ordinary shareholders.
3. Decrease in Share Price, Although there is no obligation to pay dividends on preferred shares, failure to pay dividends for several years creates a negative attitude in the minds of shareholders about the financial viability of the company and lowers the market value of the shares.
Why Preferred Stock or Share is Labeled As Hybrid Security:
For this reason, preferred shares are considered as Eiybrid financing. Analyzing the characteristics of the preferred shares, it is seen that some of its features have made the common shares and some of the features similar to the preferred shares like Debi and the preferred shares with fixed dividends.
However, if the company fails to pay the dividend by paying dividends to the rightful shareholders, the liability does not arise as in the case of non-payment (army). From this point of view priority shares are categorized as shares. Unconsciously, like the holders of debt securities, due to receiving a fixed dividend, the equivalent of an ounce. Since skepticism.
Therefore, the worst features of ordinary shares and debt have been combined in priority shares. This is more acceptable from the point of view of debt.
As we know, preferred shareholders receive a certain dividend. Which is consistent with the characteristics of the army. Because the owners of the bonds also get a certain amount of interest.
But the interest paid on the bonds is an allowable expense. On the other hand the fixed charge paid on priority shares is not an allowable expense. And this is why it is not so attractive from the point of view of the organization. Dividends on preferred shares are not an allowable expense, so the cost of debt is higher than that.
However, from the investor’s point of view, even if they bear the risk of ownership, they cannot participate in the profits like ordinary shareholders.
Valuation of Preferred Srock:
Significant amount The valuation of preferred shares is usually much like the valuation of bonds, most of the preferred shareholders receive dividends at fixed rates from time to time, in case of fixed maturity payable returns at the end of the term.
And refers to the current valuation of the written value due at maturity.This current value is the actual value of the preferred shares.Preference shares can be valued in two ways based on the term specified, namely: Indefinite or perpetual Evaluation of fixed priority shares (no mention of maturity).
1. Valuation of Preferred Stock with Definite Time, In such cases a specific term is specified. Dividends are available at fixed rates at fixed rates.
2. Maturity Value (which is usually equal to Face value) is also available at maturity.
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