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Participating Feature
Preferred stock where the holder is allowed to participate in increasing dividends if the common stockholders receive increasing dividends.
Preferred stockholders are not normally given a voice in management unless the company is unable to pay preferred stock dividends during a specified period. Any situation in which the company defaults under restrictions in the agreement may lead to voting power for preferred shareholders. Preferred shareholders cannot force the immediate repayment of obligations.
Call Provision -- almost all issues carry a call price which is above the original issuance price and may decrease over time.
Sinking Fund Partially ensures the orderly retirement of the stock. Conversion -- certain issues are convertible into common stock at the option of the preferred stockholder.
Continued
Outstanding shares
Treasury stock
Par Value
Face Value of a stock or bond. A recorded figure in the corporate charter and is of little economic consequence. Not to be issued at Under Par (discount) (i) Contingent Liability for the company, (ii) In case of Liquidation, shareholders will be legally liable to the creditors. Common stock that is authorized without par value is carried on the books at the original market price or at some assigned (or stated) value.
Example:
Fawlty Pacemakers, Inc.
Common stock ($5 par value; 10,000 shares issued and outstanding) Additional paid-in capital Total shareholders equity $ 50,000 400,000 $ 450,000
The par value of Fawlty Pacemakers, Inc., is $5 per share. But they are issuing at $45 per Share. This value is not likely to change over time from normal day-to-day operations. The difference between the issuing price and the par or stated value is additional paid-in capital.
Common stock ($5 par value; 10,000 shares issued and outstanding) $ 50,000 Additional paid-in capital 400,000 Retained Earnings 80, 000 Total shareholders equity $ 530,000 Book Value (per share) = 530,000/10,000 = $53
Assets are sold less than their Book Value when Liquidating Costs are involved. For the company involved, this value may be greater than book value.
B. Voting Rights
Shareholders are owners of the firm, they are entitled to elect the board of directors. Shareholders are generally geographically widely dispersed. Two methods of voting: (1) in person or (2) by proxy Proxy -- A legal document giving one person authority to act for another.
Cont
SEC regulates the solicitation of proxies and requires companies to disseminate information to their shareholders through proxy mailings. Most shareholders, if satisfied with company performance, sign proxies in behalf of management.
Two classes of common stock, usually designated Class A and Class B. Class A is usually the weaker voting or nonvoting class, and Class B is usually the stronger. This is used to retain control for founders, management, or some other specific group.
Cont
For example, 80,000 shares are issued to Class A at $20/share and company raised $2 million from this. And 200,000 shares issued to Class B at $2/share; $1.6 million gained. Class A puts up 80% of the funds, but Class B has over 70% of the votes Usually Class B takes a lower claim to dividends and assets than Class A for this voting control.