Bondholders may benefit from the orderly retirement of debt (amortization effect), which reduces the default risk of the firm and adds liquidity to bonds outstanding.
Balloon Payment -- A payment on debt that is much larger than other payments.
Many bond issues are designed to have a larger final payment to pay off the debt.
For example, a corporation may undertake a $10 million, 15-year bond issue. The firm is obligated to make $500,000 sinking-fund payments in the 5 th through 14 th years. The final balloon payment in the 15 th year would be for the remaining $5 million of bonds.
A requirement that all cumulative unpaid dividends on the preferred stock be paid before a dividend may be paid on the common stock.
For example, if the board of directors omits a $6 preferred dividend for two years, it must pay preferred shareholders $12 per share ($100 par value) before any dividend can be paid to common shareholders.
The corporation does not have to make up the dividend even if it is profitable, as long as the firm has no plans to pay dividends to common shareholders.
Preferred stock where the holder is allowed to participate in increasing dividends if the common stockholders receive increasing dividends.
Preferred stockholders have a prior claim on income and an opportunity for additional return if the dividends to common stockholders exceed a certain amount.
A 6% participating preferred issue ($100 par) allows holders to share equally in any dividend in excess of $6. A $7 common dividend results in an extra $1 dividend to the participating preferred shareholders.
Call Provision -- almost all issues carry a call provision because of the infinite maturity. It is often a cheaper method of retirement than open market purchases, inviting tenders, or an exchange of securities.
Sinking Fund -- like bonds, many preferred issues provide for this method of retirement.
Conversion -- certain issues are convertible into common stock at the option of the preferred stockholder. Used most frequently in the acquisition of other companies (the transaction is not taxable to the shareholders of the acquired firm).
The book value (per share) of FunFinMan, Inc., is determined by dividing total shareholders’ equity ($1,150,000) by the shares outstanding ( 100,000 ), which yields a book value of $11.50 per share . This value is not likely to change over time from normal day-to-day operations.
The current price at which the stock is currently trading.
This value is usually greater than book value (per share), but can occasionally be less than book value (per share) for firms that have been, are or expected to be in financial difficulties. Rarely are the two values identical.
Market value (per share) may be difficult to obtain from thinly traded securities.
Right to Income - entitled to share in the earnings of the company only if cash dividends are paid (via approval by the board of directors).
Right to Purchase New Share (Maybe) Income - the corporate charter of state statute may provide current shareholders with a preemptive right, which requires that these shareholders be first offered any new issue of common stock or an issue that can be converted into common stock.
2. Cumulative Voting -- a method of electing corporate directors, where each common share held carries as many votes as there are directors to be elected and each shareholder may accumulate these votes and cast them in any fashion for one or more particular directors.