Preferred Stock and Convertible Bonds 2003

8/4/2019 Preferred Stock and Convertible Bonds 2003

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Other sources of corporate financeworkshop


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Contents1. Preferred Stock2. Convertible Securities


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The Old McDonal Corporation Ms. Huyen Ta Ms. Trang Duong Ms. Tinh Le


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Preferred StockBe an equity security

Bring for stockholders preferred right


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DividendsDistributions incase of bankruptcyVoting rights

Preferred

Stock

Common

Stock

Comparison


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Dividends

Dividends shared proportionally Fixed dividends


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Distributions in case of bankruptcy


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Voting rightsCommon Stockholders have the rightto vote on some important decisionssuch as merger and acquisition,appointments to the Board ofDirectors

Preferred Stockholders havelimited voting rights, only on somematters affecting their security.


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INCOME INCOMETAX

DIVIDENDS

Similarity

Some industrial firms mayfind this an obstacle to issuestocks. But they can pass thetax disadvantage to customers.


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Tax advantage

Preferred Stock: 30% of dividends are taxed.

Bonds: 35% of dividends are taxed.

If you buy preferred stock, howmuch effective tax rate do you gain?

30%.35%=10.5%


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Interest rate increases

Preferred stock price falls. Pricefalls???Shareholders worry.


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A type of preferred stock, whose dividend, instead of being fixed, is adjusted usuallyquarterly, based on change in interest rate. Dividends determined by a pre-set formula. Stable stock prices because dividends change

can offset price changes. Also called variable-rate or adjustable-rate.

Floating-rate preferred stock


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Floating-rate preferred stockInterest rate: 1.3%Preferred stock price: 100,000 VND per shareDividend: fixed amount of 10,000VND pershare at year-end.If interest rate rises to 1.4%, the dividend may

rise to 12,000VND per share to avoid adecrease of preferred price.=> The investment of stockholders is protected.


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Definition of convertible securities A "convertible security" is a security -

usually a bond or a preferred stock -that can be converted into a differentsecurity - typically shares of thecompany's common stock.


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Commonstock(lowinterest)

Option(warrant)

Convertible

securities

Convertible securities


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Convertible bond

Convertible preferred stock

Convertible securities


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Convertible bond Give its owner the option to exchange the bond

for a predetermined number of commonshares.


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Like other bonds, they come with a fixed interest rate(coupon rate) and a maturity date by which they willreach face value (par value).

It sells at a higher price than a comparable bond that isnot convertible.

Convertible bond


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If your company does well..

turn into stockand

If not

Only receive real value ofbonds.


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For examples You purchase one share of Mc Donald stock at a price of$50 during the next 5 years. At the end of 5 years:

If the stock price is 80$,pay thecompany 50$ and receive inexchange a share worth 80$

If the stock price is lower,noextra money you get,thewarrant expire worthless


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Receive preferredstock with fixeddividend payment

Has the option toexchange it forcommon stock


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The conversion ratio for convertiblepreferred stock is typically small and mayeven be as low as one for one.

It's generally not as popular as convertiblebonds.



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All of the following statements about convertiblebonds are FALSE EXCEPT:

A. If all of the bonds are converted, the stockholders willbenefit.B. They depreciate when the stock rises in value.C. They typically carry lower interest rates than non-convertible bonds.D. They receive interest payments after convertiblepreferred stock in case of default


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Correct answer: C

Convertible bonds generally offer a lower yieldcompared to normal bonds that do not have theconvertible option.


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Thank you for your attention!Host:Nguyen Thu HangHa Ly HuongGuests:Ta Thanh HuyenDuong Hien TrangLe Thi Tinh

Preferred Stock and Convertible Bonds 2003

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