Preferred Stock Essay Example for Free

favored Stock EssayPreferred billet is a security that, similar to debt, promises a well-defined (specified) but not necessarily constant contractual cash flow (dividend) to the holders of the security. Unlike debt, it does not cause the firm to be subject to loser if the dividends are not paid. The term preferred transport implies that this security is in a more favorable position than the common well-worn. This conclusion is not in all likelihood to be valid for an individual investor paying taxes 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 difficult for preferred stock to compete with debt in the non-regulated sector of corporate activity. Also, the smashing gains and tax deferred possibilities for individual investors of common stock give common stock tax advantages over preferred stock with a contractual dividend and little vista of capital gains. Preferred stock has historically been important to regulated populace 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. Like 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. Like common stock, preferred stock is generally treated as equity capital for corporate tax purposes, so its dividends are paid from corporate earnings that shed been taxed.Preferred stock generally has a perpetual life, although it may have a finite life, and it may have a call price specified and tear down a sinking fund where stock is to be repurchased by the firm in the open mar ket. 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 wakeless liability of the corporation. Preferred stock generally does not have voting right wings, 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.