EquitiesEuities.docVIP

Equities Preferred Shares - Characteristics Equity - no maturity date, no voting privileges unless Fixed dividend - price fluctuates as market yields fluctuate Preference as to assets - in dissolution - before common, after debt Preference as to dividends - paid before common dividend Dividend tax credit - preferential tax treatment Bought by income oriented investors No maturity date Why company issue prefs? Types of preferreds Straight - fixed dividend - want - pass 4 tests of investment quality (discussed in Chapter 8) cumulative dividend adequate protective provisions purchase/sinking fund to provide support eligible for DTC Convertible -convert to common, at holders option, at stated price for a stated time period - want -- positive outlook for common, reasonable conversion premium, long conversion life, far call date Retractable - holder can force company to buy back -want -- long life for retraction privilege - price performance -- more stable if retraction date approaching Floating Rate - dividends fluctuate to reflect changes in interest rates price -- more stable - want - floor on dividend, reasonable variable formula Participating - specified dividend - share in earnings according to formula Eg. $1 fixed dividend plus 50% of common dividend over $1 Foreign pay - payable in foreign currency -- want strong currency COPrS - Canadian Originated Preferred Shares - long term junior subordinated debt - hybrid of debt preferred - interest for tax purposes -- interest can be deferred up to 20 quarters Split Shares - common shares split into 2 components -- dividends capital gains Preferred Features Cumulative - unpaid dividends accumulate must be paid before common dividend is paid eg. Pref - 5% dividend, $25 par value, 1 million shares O/S, missed dividend for last 3 years -- What must the company pay pref shareholders before common can be paid? Callable Equities - 2 Purchase fund Sinking fund Protective Provisions