FIN 3715 Chapter Notes - Chapter 8: Preferred Stock, Stock Valuation, Hybrid Security
Document Summary
It is a hybrid security with features of common stock and bonds. Like common stock it has no fixed maturity date, non-payment cannot bring on bankruptcy, and dividends are not deductible for tax purposes. Like preferred stock, the dividends are limited in amount. The preferred stockholder receives a fixed dividend in each period. This type of stock indicates ownership of a firm, and does not have a maturity rate. There is also no upper limit on dividend payments, and dividend payments must be declared on a per period basis. Characteristics of common stock: claim on income: common stockholders have right to the residual income after creditors and preferred stockholders have been paid. Common stock dividend is based on the profitability of the firm, and the decision to give out dividends or reinvest earnings back into the firm. Therefore dividend earnings increase with increase in corporate earnings. The firm"s growth from reinvesting the profits is called internal growth.
