Preferred Stock
Equity with a fixed dividend and seniority over common stock in dividends and liquidation — but typically no voting rights.
Cumulative preferred shares accrue any dividends in arrears, which must be cleared in full before any common dividend resumes; non-cumulative shares simply forfeit the missed payment. The exam loves to make you value perpetual fixed-rate preferred as a perpetuity: V = D ÷ r, then ask how the price reacts when the required yield rises — it falls. Watch the feature labels: participating preferred shares in profits above the stated dividend, callable lets the issuer redeem (a cap on investor upside), and putable lets the holder sell back (a price floor) — students routinely flip callable and putable.
The classic trap is treating preferred like common equity: preferred dividends are declared at the board’s discretion, so skipping them does not trigger default the way an unpaid bond coupon would — yet they rank ahead of common in both dividends and liquidation. Distinguish it from a plain dividend too: a common dividend can be raised indefinitely, whereas straight preferred’s payout is fixed and capped (the participating variety being the exception). Hook: preferred is the “senior, silent” cousin — paid first, but no vote and little growth.
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