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Key Terms

The Key Terms listed below are important words that have been highlighted throughout this chapter of your textbook. You will find them in the margins of your textbook along with their corresponding definitions. Please review these key terms and recall their relevance to the material covered in this chapter.

Adjustable rate preferred stock: Preferred stock intended to provide investors with some protection against wide swings in the stock value that occur when interest rates move up and down. The dividend rate changes along with prevailing interest rates.

Auction rate preferred stock: Variable rate preferred stock in which the dividend rate is set by an auction process.

Call provision: Lets the company buy its preferred stock back from the investor, usually at a premium price above the stock's par value.

Common stock: Common stock shares represent the ownership in a corporation.

Convertible preferred stock: Convertible preferred stock allows the preferred stockholder to convert the preferred stock into a predetermined number of shares of common stock, if he or she so chooses.

Cumulative preferred stock Requires all past unpaid preferred stock dividends to be paid before any common stock dividends are declared.

Cumulative voting: Each share of stock allows the shareholder a number of votes equal to the number of directors being elected. The shareholder can then cast all of his or her votes for a single candidate or split them among the various candidates.

Majority Voting: Each share of stock allows the shareholder one vote, and each position on the board of directors is voted on separately. As a result, a majority of shares has the power to elect the entire board of directors.

Participating preferred stock: Allows the preferred stockholder to participate in earnings beyond the payment of the stated dividend.

PIK preferred stock: Investors receive no dividends initially; they merely get more preferred stock, which in turn pays dividends in even more preferred stock.

Preemptive rights: The right of a common shareholder to maintain a proportionate share of ownership in the firm. When new shares are issued, common shareholders have the first right of refusal.

Preferred stock: A hybrid security with characteristics of both common stock and bonds. It is similar to common stock because it has no fixed maturity date, the nonpayment of dividends does not bring on bankruptcy, and dividends are not deductible for tax purposes. Preferred stock is similar to bonds in that dividends are limited in amount.

Protective provisions: Provisions for preferred stock that are included in the terms of the issue to protect the investor's interest.

Proxy: A proxy gives a designated party the temporary power of attorney to vote for the signee at the corporation's annual meeting.

Proxy fights: When rival groups compete for proxy votes in order to control the decisions made in a stockholder meeting.

Rights: Certificates issued to shareholders giving them an option to purchase a stated number of new shares of stock at a specified price during a 2- to 10-week period.

Sinking fund: A cash reserve used for the orderly and early retirement of the principal amount of a bond issue. Payments into the fund are known as sinking fund payments.

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