ACC206: Principles of Accounting II

ACC206: Principles of Accounting II

Discussion 1

Callable Preferred Stock

The preferred stocks by definition mean a way for the companies to raise capital for increasing their growth. It is a type of representative portion of the share capital of a company, without voting rights and with priority in the distribution of dividends By name they are called preferred because if at some time a company goes bankrupt the preferred stockholders will get paid for that even before the common stockholders but after the bondholders of the company and then the company is not left with any value by that time .

A callable stock is a kind of preferred stock, which gives the right to the issuer to call or convert the stock at the current price and a predetermined date. A callable preferred stock has some terms that is the call price of the stock, date at which a stock can be called and its premium. A callable preferred stock is also called a redeemable preferred stock (Le, 2007).

If an investor is holding a callable preferred stock is at a disadvantage because if a particular preferred issue is called back by the issuer then the investor faces a problem of reinvesting the income at a dividend or interest rate that is lower (Josephs, 2010).

Why do corporations issue such Stock?

Preferred stock is the class of the shareholder equity that posses the characteristics of both that is common stock and bonds. Corporations however, issue these stocks to receive funds from traditional investors who desire large amount of dividends. Some of the corporations are also seen as the buyers of these preferred stocks. These corporations have another motive as well they issue preferred stocks only when they have received all they could from the issue of common stock ...