3.2 Preferred Stock
Preferred stock behaves as an equity-debt hybrid, trading inversely with interest rates like fixed-income securities while granting priority dividend status over common stock.
Key NASAA Exam Takeaways
- Preferred stock pays a fixed dividend stated as a percentage of par ($100) or dollar amount.
- Cumulative preferred requires all past unpaid dividends (dividends in arrears) to be paid before any common dividends.
- Participating preferred permits receiving additional dividends if corporate earnings exceed specified benchmarks.
- Callable preferred allows the issuer to repurchase shares at a stated price, typically exercised when interest rates fall.
Knowledge Checkpoint • Section 3.2
An issuer has missed paying dividends on its 7% preferred stock for the past two years. If the preferred shares are cumulative, what total dividend per share must be paid to preferred stockholders before common shareholders can receive any dividend in year 3?