FIN 313 - Ch. 8 Vocab

Preferred stock

a hybrid security with characteristics of both common stock and bonds. Preferred stock is similar to common stock in that it has no fixed maturity date, the nonpayment of dividends does not bring on bankruptcy, and dividends are not deductible for tax purposes. Preferred stock is similar to bonds in that dividends are stated as a percent of par value and limited to the contractually stated amount.

cumulative feature

a requirement that all past, unpaid preferred stock dividends be paid before any common stock dividends are declared.

protective provisions

provisions for preferred stock that protect the preferred stockholders’ investment in the firm. The provisions generally allow for voting in the event of nonpayment of dividends, or they restrict the payment of common stock dividends if sinking-fund payments are not met or if the firm is in financial difficulty.

convertible preferred stock

preferred shares that can be converted into a predetermined number of shares of common stock, if investors so choose.

call provision

a provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods.

sinking-fund provision

a protective provision often contained in bond or preferred stock contracts that requires the firm periodically to set aside an amount of money for the retirement of the stock or bond issue. This money is then used to purchase the preferred stock or bonds in the open market or through the use of the call provision, whichever method is cheaper.

Common stock

shares that represent ownership in a corporation.

limited liability

a protective provision whereby the investor is not liable for more than the amount he or she has invested in the firm.

proxy

a means of voting in which a designated party is provided with the temporary power to vote for the signee at the corporation’s annual meeting.

proxy fights

a battle between rival groups to control the decisions made in a stockholders’ meeting.

majority voting

voting in which each share of stock allows the shareholder one vote and each position on the board of directors is voted on separately. As a result, a majority of shares has the power to elect the entire board of directors.

cumulative voting

voting in which each share of stock allows the shareholder a number of votes equal to the number of directors being elected. The shareholder can then cast all of his or her votes for a single candidate or split them among the various candidates.

preemptive right

the right entitling the common shareholder to maintain his or her proportionate share of ownership in the firm.

rights

a certificate issued to common stockholders giving them an option to purchase a stated number of shares from a security offering at a specified price.

internal growth

a firm’s growth rate resulting from reinvesting the company’s profits rather than distributing them as dividends. The growth rate is a function of the amount retained and the return earned on the retained funds.

profit-retention rate

the percentage of a firm’s earnings that it retains and reinvests within the firm.