Obtaining a form of participation within a company through preferred shares, gives certain privileges that ordinary shareholders do not have
Preferred shares give their holders certain privileges of priority over common shareholders. Companies generally do not issue large amounts of preferred shares, and the proportion of such shares in a company's stockholders' equity is usually quite small.
Preferred shares are sometimes considered a form of "near debt" because of a fixed periodic dividend associated with them.
Restrictive generality
The restrictive clauses usually found in an issue of preferred shares are intended to ensure the continued existence of the company
Preferred shareholders are promised a fixed periodic return that is established as a percentage or in cash. The way in which the dividend is established depends on whether it has par value. The par value of a share is the nominal value of the share specified in the "Certificate of Incorporation"
Types of preferred shares
Cumulative preferred shares
Most preferred shares are cumulative, which means that past due dividends must be paid before distributing dividends to ordinary shareholders.
Non-cumulative preferred shares
These do not entitle the holder to the eventual receipt of approved dividends, but rather stipulates that the issuer pay only current dividends before paying ordinary shareholders.
Participating preferred shares
In this type, the holders receive higher dividends than those established, participating with ordinary shareholders in distributions that go beyond a certain level. Most of the shares are non-participatory.
Rights of preferred shareholders
The primary rights of preferred shareholders regarding voting and distribution of profits and assets are slightly more favorable than those of common shareholders. Since the preferred stock is a form of ownership and has no maturity, your claims on profits and assets come after that of the company's creditors.
Right to vote
Preferred shareholders have many of the characteristics of both creditors and owners.
Since the preferred shareholder is promised a fixed periodic return similar to the interest paid to the creditors, but does not expect the company to return its capital upon maturity, it is often regarded as a provider of resources.
Since the investment in preferred shares is permanent, it represents ownership, but since the claim of the preferred shareholders on the profits of the company is fixed and has priority over the claim of common shareholders, they are not exposed to the same degree of risk as common shareholders.
Consequently, preferred shareholders are normally not entitled to vote.
In almost all cases, companies when they issue a preferred stock issue, their owners prohibit the issue of additional securities that take precedence over the preferred stock
Distribution of profits
Preferred shareholders are given preference over common shareholders with respect to the distribution of profits. If the preferred stock dividend established by the board of directors is omitted, the payment of dividends to common shareholders is prohibited.
It is this preference in the distribution of dividends that makes the common shareholders the ones who truly assume the risk with respect to the expected return.
It should also be borne in mind that the existence of preferred shares within the company tends to a detriment to the maximization of the wealth of the majority owners.
Asset distribution
Preferred shareholders are usually given preference over the liquidation of assets as a result of bankruptcy. Although the preferred shareholder must wait until the claims of all creditors have been satisfied.
The amount of the claim is equal to the par value established in the preferred stock book.
Since preferred shares represent a special class of ownership interest in the company. Preferred shareholders must receive their established dividends before the distribution of any kind of profits to common shareholders.
Since preferred stock is a form of ownership and the business is considered a 'going concern', the proceeds from the sale of preferred stock are expected to be retained for an indefinite period of time.
Calculation of the cost of preferred shares
The cost of the preferred shares (Kp) is found by dividing the annual dividend of the preferred share (Dp) by the net proceeds from the sale of the preferred share (Np), this would be:
The net product represents the sum of money that can be received after deducting any sales expenses necessary to place the stock on the market.
Since preferred stock dividends are paid from the company's cash flows after tax, no tax adjustment is required.
Dividend Statement of Preferred Stock
The amount of dividends for preferred shares that must be paid annually before distributing profits to common shareholders to establish in cash or as a percentage of the par or par value of the share.
Cash
Most dividends for preferred shares are established in terms of a stated amount per year. When dividends are established in this way, the share is called "Sum Preferred Stock."
Percentage amounts
Sometimes preferred stock dividends are set as a percentage annual rate. This rate represents the percentage of the par or par value of the share, which is equal to the annual dividend.
Before calculating the cost of the preferred share, the dividends established as percentages must be converted to the annual sum of the case for dividends.
