FA 43 - Shareholders' Equity

Summary

In this financial accounting module, the focus shifts to 'preferred shares,' a type of stock that offers certain advantages, particularly in bankruptcy scenarios where they are prioritized over common shares for repayment. The video explains that despite the appealing name, preferred shares may not always be the best investment, especially when considering their dividend preferences, which include the right to receive dividends before common shareholders and the feature of cumulative dividends. The script also touches on other attributes like convertibility, callability, retractability, and participation in dividends, setting the stage for a deeper dive into shareholder equity problems.

Takeaways

• 📚 Module 10 is a technical module focusing on shareholders' equity, with a new account called 'preferred shares' being introduced.
• 🎲 The instructor shares a personal anecdote about a board game called 'Stock Ticker' that incorrectly portrayed preferred shares as always better than common shares.
• 💡 The name 'preferred shares' might suggest they are superior, but this is not always the case and depends on the context of the investment.
• 🔄 Common shares typically offer more upside potential and are the more common form of investment when buying into a company.
• 🏦 Preferred shares are called 'preferred' primarily because they have priority over common shares in the event of a company's bankruptcy.
• 💰 Preferred shares often have dividend preference, meaning dividends must be paid to preferred shareholders before common shareholders can receive theirs.
• 📊 Cumulative dividends are a feature of some preferred shares, where if a dividend is missed, it accumulates and must be paid in the future.
• 🔄 Convertibility is an optional feature where preferred shares can be converted into common shares under certain conditions.
• 🛒 Callability allows the company to buy back preferred shares, which benefits the company rather than the shareholder.
• 🔄 Redeemability or retractability gives preferred shareholders the right to sell their shares back to the company under certain conditions.
• 🚀 Participating preferred shares allow for additional dividends if common shareholders receive more than the initially promised dividend amount.

Q & A

What is the main focus of Module 10 in the financial accounting course?

The main focus of Module 10 is on shareholders' equity, with a specific emphasis on a new account called preferred shares.

What was the speaker's childhood experience with the board game 'Stock Ticker'?

The speaker's experience with 'Stock Ticker' involved buying stocks based on dice rolls, where the price of the stock would go up or down accordingly. The game incorrectly treated preferred shares as having a multiplier effect on gains and losses compared to common shares.

Why did the speaker initially prefer preferred shares based on the board game?

The speaker initially preferred preferred shares because the game 'Stock Ticker' made them seem more advantageous due to the multiplier effect on stock price changes.

What is the common misconception about preferred shares based on their name?

The common misconception is that preferred shares are always better investments than common shares, due to the word 'preferred' in their name, which implies a higher status or benefit.

What are common shares and what rights do they give to shareholders?

Common shares are the most frequently issued type of share that gives the shareholder the right to participate in the company's gains and losses, with a focus on the potential for significant upside.

Why might preferred shares be considered 'preferred' in certain situations?

Preferred shares are considered 'preferred' mainly in the context of bankruptcy, where they have priority over common shares in the distribution of assets during liquidation.

What is dividend preference and how does it benefit preferred shareholders?

Dividend preference means that preferred shareholders must be paid dividends before any dividends can be paid to common shareholders. This ensures that preferred shareholders receive dividends first.

What is a cumulative dividend and how does it differ from a regular dividend?

A cumulative dividend is a feature of preferred shares where if a dividend is not paid in one period, it accumulates and must be paid in the future, in addition to the regular dividend for subsequent periods.

What are some optional features of preferred shares discussed in the script?

Some optional features of preferred shares include cumulative dividends, the ability to convert into common shares, being callable by the company, retractable by the shareholder, and participating in additional dividends paid to common shareholders.

What is the primary feature of preferred shares that the chapter will focus on?

The chapter will primarily focus on dividend preference and the feature of cumulative dividends for preferred shares.

Why might a company choose to issue preferred shares over common shares?

A company might issue preferred shares to provide certain benefits to investors, such as priority in dividend payments and asset distribution in case of bankruptcy, which can attract a different class of investors compared to common shares.