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Questions and Answers
Which type of security combines features of both debt and equity?
What characteristic of preferred stock allows preferred stockholders to receive dividends before common stockholders?
In the event of company liquidation, who has priority in receiving their investment back?
What feature allows some preferred stock to be converted into shares of common stock upon certain conditions?
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Which type of preferred stock allows accumulated dividends to be omitted without future obligation to pay them?
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Which type of financing offers a blend of debt and equity characteristics, providing companies with greater flexibility in raising capital?
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What is the purpose of assessing the company's dividend coverage ratio?
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What is the primary benefit of leasing in terms of cash?
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In what type of lease does the lessee assume most of the ownership risks and responsibilities?
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What is the key consideration when investing in convertible preferred stock?
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What type of leasing allows businesses to acquire assets without long-term commitments?
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What is a potential risk associated with callable preferred stock?
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What is a tax advantage of leasing?
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What should be carefully evaluated when considering leasing?
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In what type of lease does the lessor retain ownership of the asset?
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What does cumulative dividends provide protection against?
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Study Notes
Security Types
- Hybrid security combines features of both debt and equity, offering diverse investment characteristics.
- Preferred stockholders receive dividends before common stockholders due to the cumulative dividend feature, ensuring priority in distributions.
Liquidation Priority
- In the event of company liquidation, preferred stockholders have priority over common stockholders in recovering their investments.
Conversion Features
- Convertible preferred stock includes a feature that allows it to be converted into shares of common stock under certain conditions, enhancing flexibility for investors.
Dividend Characteristics
- Cumulative preferred stock permits dividends to accumulate if unpaid, allowing preferred stockholders to receive owed payments when funds are available.
Financing Blend
- Mezzanine financing blends debt and equity characteristics, providing companies with greater flexibility in raising capital while balancing risk and returns.
Dividend Coverage Ratio
- Assessing the dividend coverage ratio is crucial for evaluating a company's ability to meet dividend payments from earnings, indicating financial health.
Leasing Benefits
- The primary benefit of leasing is improved cash flow management, allowing companies to maintain liquidity by avoiding large upfront costs.
Lease Types
- In a capital lease, the lessee assumes most of the ownership risks and responsibilities, treating the lease similarly to financing.
- Operating leases allow businesses to acquire assets without long-term commitments, making them advantageous for short-term use.
Convertible Preferred Stock
- When investing in convertible preferred stock, the key consideration is the conversion ratio, which determines how many common shares it converts into.
Callable Preferred Stock Risks
- A potential risk associated with callable preferred stock is that companies can repurchase shares before the expected maturity, impacting returns for investors.
Tax Advantages
- One tax advantage of leasing is the ability to deduct lease payments as business expenses, which can enhance tax efficiency.
Leasing Evaluation
- When considering leasing, it is essential to carefully evaluate the total cost of ownership versus leasing expenses, including potential tax benefits.
Lease Ownership
- In an operating lease, the lessor retains ownership of the asset, allowing for flexibility in asset usage without long-term liability.
Cumulative Dividends Protection
- Cumulative dividends provide protection against missed payments, ensuring preferred stockholders receive dividends even if they are deferred temporarily.
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Description
Test your knowledge about hybrid financing options such as preferred stock, leasing, warrants, and convertibles, which offer a blend of debt and equity characteristics. Learn about the key features and advantages for investors of preferred stock, a type of equity security that combines features of both debt and equity.
