This document discusses hybrid financing through preferred stock. Preferred stock is a type of stock that promises a fixed dividend but payment is at the discretion of the board. It has preference over common stock for dividend payments and claims on assets up to par value. Key features of preferred stock include cumulative dividends that must be paid before common dividends, participating dividends that increase with common dividends, and potential voting rights in special situations. Advantages are that missed preferred dividends do not cause bankruptcy as with bonds, it avoids dilution of common equity, and repayment is spread over long periods. Disadvantages are preferred dividends are not tax deductible, so cost is higher than debt, and their use increases financial risk and cost of

1. Hybrid Financing
Prepared by:
Jammie Ann Felipe

2. Preferred Stock
• A hybrid form of financing
• A type of stock that promises a (usually)
fixed dividend but at a discretion of the
board of directors.
• It has preference over a common stock in
the payment of dividends and claims on
asset (but up to a maximum
of Par Value of the stock)

3. Preferred Stock and its Features
• Cumulative Dividends Feature
- A requirement that all cumulative
unpaid dividends on the preferred stock
be paid before a dividend may be paid
on the common stock.

4. Preferred Stock and its Features
• Participating Feature
- allows preferred stockholders to
participate in the increasing dividends if
the common stockholders receive
increasing dividends.

5. Preferred Stock and its Features
• Voting Rights (In Special Situations)
- Given usually if corporation is unable
to pay preferred stock dividends during
a specified period.

6. Advantages of Preferred Stock
• 1. Passing a preferred dividend cannot
force a firm into bankruptcy, whereas
failure to pay interest on a bond can lead
to bankruptcy.
• 2. By issuing preferred stock, the firm
avoids the dilution of common equity that
occurs when common stock is sold.

7. Advantages of Preferred Stock
• 3. Since preferred stock sometimes has no
maturity and since preferred sinking fund
payments, if present, are typically spread
over a long period, preferred issues can
reduce the cash flow drain from
repayment of principal that occurs with
debt issues.

8. Disadvantages of Preferred Stock
• 1. Preferred stock dividends are not
deductible to the issuer; consequently, the
after-tax cost of preferred is typically
higher than the after-tax cost of debt.

9. Disadvantages of Preferred Stock
• 2. Although preferred dividends can be
passed, investors expect them to be paid
and firms intend to pay the dividends if
conditions permit. Thus, preferred
dividends are considered a fixed cost.
Therefore, their use, like that of debt,
increases the firm’s financial risk and thus
its cost of common equity.

11. Common Stock vs.
Preferred Stock

12. End