Preferred Stock Essay Example for Free

Preferred extraction EssayPreferred crinkle is a security that, similar to debt, promises a well-defined (specified) but non necessarily constant contractual cash flow (dividend) to the holders of the security. Un wish debt, it does not cause the firm to be subject to bankruptcy if the dividends are not paid. The term preferred dividing line implies that this security is in a more favorable position than the prevalent mental strain. This conclusion is not plausibly to be valid for an idiosyncratic investor paying imposees at a high rate on dividends. A corporate investor might like preferred stock because of a70%dividend-received deduction.The corporate tax savings associated with interest on debt make it laborious for preferred stock to compete with debt in the non-regulated sector of corporate activity. Also, the capital gains and tax deferred possibilities for individual investors of leafy vegetable stock give uncouth stock tax advantages over preferred stock wi th a contractual dividend and little chance of capital gains. Preferred stock has historically been important to regulated public utilities, and it is likely to be approximately 10 percent of a typical public utilitys capital structure.Preferred stock is a hybrid form of capital, possessing a mixture of debt and common stock characteristics. wish the interest on debt, its dividends may be fixed over time. However, participating preferred stock shares income with common stock according to some prearranged formula and other preferred stock may pay a dividend that is linked to some independent measure such as the yield on government bonds. kindred common stock, preferred stock is generally treated as equity capital for corporate tax purposes, so its dividends are paid from corporate earnings that have been taxed.Preferred stock generally has a perpetual life, although it may have a finite life, and it may have a call damage specified and even a sinking fund where stock is to be repu rchased by the firm in the open market. It is important to the issuing firm and to the investor that nonpayment of the preferred stock dividend does not trigger bankruptcy. Normally, common stock dividends cannot be paid until all past due preferred dividends have been paid or the preferred stockholders have been compensated by some other means.Preferred stock dividends have to be approved by the board of directors before they become a legal liability of the corporation. Preferred stock generally does not have voting rights, but if a preferred stock dividend is passed over, the preferred stockholders sometimes have the right to select one or more members of the board of directors. Although the dividends on some preferred stock are allowed as a tax deduction, currently in the United States dividends of preferred stock are not normally deductible for taxes by a corporation. This tends to limit the use of preferred stock by corporations.