 Personal Finance Powerpoint Presentation, participating preferred stock. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia, participating preferred stock, which you can find online. Take a look at the references, resources, continue your research from there. This by Wil Kenton updated April 5th, 2021 in prior presentations. We've been looking at investment goals, investment strategies, investment tools, keeping in mind the two major categories of investment. That being fixed income, typically bonds, the equity, typically the common stock is what we think about there. We're looking now at participating preferred stock, but let's first consider just the preferred stock that we've talked about in prior presentations, which is technically on the equity side of things, but functionally lies kind of between the fixed income and the equity. So let's give a quick recap. The fixed income bonds, when we think about bonds, we think about those as something that we are in essence, loaning money to the issuer of the bond. That's going to be a corporation or government entity in exchange for interest, typically, and that's going to be the fixed income component, which is somewhat guaranteed, given the fact that if they don't pay that interest, then they default on the obligation that would be bad for the issuer of the bond. On the equity side of things, we typically think common stocks, which are ownership of a corporation, corporations being separate legal entities, breaking out ownership into even chunks, those being the stocks. Some of those corporations might choose to become publicly traded trading on an exchange, which is usually what we are talking about from the investment side of things, those corporations trading on a public exchange. When we're looking at the preferred stock, then the preferred is structured in such a way that the dividends, which are the payments of the earnings of the shares, similar to kind of like draws in a partnership, where we earn money, take money out then in the form of a draw for personal use on the corporation side of things. Us as shareholders are going to take money out in the form of dividends, but we cannot declare the dividends because all the stocks need to be the same in nature. Therefore, the board of directors and management determine how much the dividends will be per share, for example. So the dividends going out to the preferred stock are typically going to be structured in a way similar to the bonds and be more of a guaranteed kind of payment, although possibly not as guaranteed as the bonds. You've got to pay them before you pay the common stockholders. That's why they're preferred, not to mean that the preferred stock is better in essence than common stock, but that's the preferred component. And then they also get paid sooner if there was a liquidation or bankruptcy of the company than the common stockholders, although after the bonds. Okay, given that setup, what is participating preferred stock then? So the participating preferred stock is a type of preferred stock that gives the holder the right to receive dividends equal to the customarily specified rate that preferred dividends are paid to preferred shareholders as well as an additional dividend based on some predetermined conditions. So that's going to be the new component here. Participating preferred stock can also have liquidation preferences upon a liquidation event. In other words, they go bankrupt, for example, the company. Participating preferred stock, participating preferred stock like other forms of preferred stock takes precedence in a firm's capital structure over a common stock, but ranks below debt and liquidation events. So if the company went out of business, then they've got to pay the preferred stockholders before the common stockholders, although the bondholders still have preference typically over the preferred stockholders. That's typical of pretty much all of the preferred stock in general. An additional dividend paid to preferred shareholders is commonly structured to be paid only if the amount of dividends that common shareholders receive exceeds a specified per share amount. Furthermore, in the event of liquidation, participating preferred shareholders can also have the right to receive the stock's purchasing price back as well as a pro-rata share of any remaining proceeds that the common shareholder receives. When there is a liquidation event, whether an investor's preferred stock is participating or non-participating will determine if that investor receives additional consideration over the liquidation value of the preferred stock and any dividends owed to the investor. If an investor's preferred stock is participating, that investor is entitled to any value left over post-liquidation as if that stock had been common stock, non-participating preferred shareholders, on the other hand, receive their liquidation value and any dividends in arrears if applicable, but they are not entitled to any other considerations. Participating preferred stock is rarely issued, but one way in which it is used is as a poison pill. So a poison pill kind of situation where they're trying to stop like a hostile takeover kind of possibly. So in this case, current shareholders are issued stock that gives them the right to new common shares at a bargain price in the event of an unwanted takeover bid. So someone's trying to buy up the stocks of the corporation to get a controlling interest in the corporation possibly, for example, and they're trying to prevent that from happening by issuing like a poison pill kind of situation. So example of participating preferred stock. Suppose company A issues participating preferred shares with a dividend rate of $1 per share. The preferred shares also carry a clause on extra dividends for participating preferred stock, which is triggered whenever the dividend for common shares exceeds that of the preferred shares. So if during its current quarter, company A announces that it will release a dividend of $1.05 per share for its common shares, the participating preferred shareholders will receive a total dividend of $1.05 per share, one plus the .05 cents as well. So now consider a liquidation event. Company A has $10 million of preferred participating stock outstanding representing 20% of the company's capital structure with the other 80% or $40 million made up of common stock. So you got assets minus liabilities equals the equity, the equity representing ownership of to the owner or how much the company owes to the owner. And so it's kind of the net value of the company, which is broken out between the shareholders now in the form of common stock and the preferred stock with the 80-20 split between the common stock 80, the preferred 20. Company A liquidates and the proceeds are $60 million. The participating preferred shareholder would receive $10 million, but also would be entitled to 20% of the remaining proceeds, 10 million in this case, 20% of the 60 million minus the 10 million. Nonpartisan preferred shareholders would not receive the additional consideration.