Liquidating value of preferred stock
In return for these preferences, the preferred stockholders usually give up the right to share in the corporation's earnings that are in excess of their dividends.
To illustrate how preferred stock works, let's assume a corporation has issued preferred stock with a stated annual dividend of per year.
Preferred stock has characteristics of both equity and debt.
Preferred shares generally have a dividend requirement that makes them appear similar to debt.
For example, if one share of 9% preferred stock having a par value of 0 is sold for 1, the following entry will be made.
If the dividend percentage on the preferred stock is close to the rate demanded by the financial markets, the preferred stock will sell at a price that is close to its par value.
In other words, a 9% preferred stock with a par value of being issued or traded in a market demanding 9% would sell for .
Corporations are able to offer a variety of features in their preferred stock, with the goal of making the stock more attractive to potential investors.
All of the characteristics of each preferred stock issue are contained in a document called an indenture.