©2012 McGraw-Hill Ryerson Limited 1 of 24 Learning Objectives 3.Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights, shares and shareholder wealth during the rights-offering process. (LO3) 4.Describe poison pills and other provisions that make it difficult for outsiders to gain control of the corporation against management wishes. (LO4) 5.Characterize preferred shares as a type of security somewhere between debt and common stock. (LO5)

©2012 McGraw-Hill Ryerson Limited 2 of 24 Preferred Stock a hybrid security combining characteristics of both debt and common stock has a fixed dividend that must be paid before dividends on common stock (like a bond) dividends are not tax deductible to a company and may be omitted without triggering bankruptcy (like a stock) provides the company with a balance in its capital structure primary purchasers are corporate investors, insurance companies, and pension funds LO5

©2012 McGraw-Hill Ryerson Limited 3 of 24 Provisions Associated with Preferred Stock Cumulative Dividends: –if not paid in one year, dividends accumulate and must be paid in total before common shareholders Conversion Feature: –preferred stock may be converted into common stock at the option of the holder Call Feature: –company has option to redeem stock Retractable Feature: –investor has option to redeem stock Floating Rate Dividend: –company adjusts dividend to market conditions LO5