Finance and Business Blog

Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than voting shares, and its terms are negotiated between the corporation and the investor.

Preferred stock usually carry no voting rights, but may carry superior priority over common stock in the payment of dividends and upon liquidation. Preferred stock may carry a dividend that is paid out prior to any dividends to common stock holders. Preferred stock may have a convertibility feature into common stock. Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy. Terms of the preferred stock are stated in a “Certificate of Designation”.

Rights
Unlike common stock, preferred stock usually has several rights attached to it:

• The core right is that of preference in the payment of dividends and upon liquidation of the company. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied.
• The dividend rights are often cumulative, such that if the dividend is not paid it accumulates from year to year.
• Preferred stock may or may not have a fixed liquidation value, or par value, associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued.
• Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claim.
• Almost all preferred shares have a negotiated fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6% Series A preferred. Sometimes, dividends on preferred shares may be negotiated as floating i.e. may change according to a benchmark interest rate index such as LIBOR.
• Some preferred shares have special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights associated with them. Some preferred shares only gain voting rights when the preferred dividends are in arrears for a substantial time.
• Usually preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim. Individual series of preferred shares may have a senior, pari-passu or junior relationship with other series issued by the same corporation.
• Occasionally companies use preferred shares as means of preventing hostile takeovers, creating preferred shares with a poison pill or forced exchange/conversion features that exercise upon a change in control.

The above list, although including several customary rights, is far from comprehensive. Preferred shares, like other legal arrangements, may specify nearly any right conceivable. Preferred shares in the U.S. normally carry a call provision, enabling the issuing corporation to repurchase the share at its (usually limited) discretion.

Some corporations contain provisions in their charters authorizing the issuance of preferred stock whose terms and conditions may be determined by the board of directors when issued. These “blank check” preferred shares are often used as takeover defense. These shares may be assigned very high liquidation value that must be redeemed in the event of a change of control or may have enormous supervoting powers.

Users
Preferred shares are more common in private or pre-public companies, where it is more useful to distinguish between the control of and the economic interest in the company. Government regulations and the rules of stock exchanges may discourage or encourage the issuance of publicly traded preferred shares. In many countries banks are encouraged to issue preferred stock as a source of Tier 1 capital. On the other hand, the Tel Aviv Stock Exchange prohibits listed companies from having more than one class of capital stock.

A single company may issue several classes of preferred stock. For example, a company may undergo several rounds of financing, with each round receiving separate rights and having a separate class of preferred stock; such a company might have “Series A Preferred”, “Series B Preferred”, “Series C Preferred” and common stock.

In the United States there are two types of preferred stocks: straight preferreds and convertible preferreds. Straight preferreds are issued in perpetuity (although some are subject to call by the issuer under certain conditions) and pay the stipulated rate of interest to the holder. Convertible preferreds–in addition to the foregoing features of a straight preferred–contain a provision by which the holder may convert the preferred into the common stock of the company (or, sometimes, into the common stock of an affiliated company) under certain conditions, among which may be the specification of a future date when conversion may begin, a certain number of common shares per preferred share, or a certain price per share for the common.

There are income tax advantages generally available to corporations that invest in preferred stocks in the United States that are not available to individuals.

Some argue that a straight preferred stock, being a hybrid between a bond and a stock, bears the disadvantages of each of those types of securities without enjoying the advantages of either. Like a bond, a straight preferred does not participate in any future earnings and dividend growth of the company and any resulting growth of the price of the common. But the bond has greater security than the preferred and has a maturity date at which the principal is to be repaid. Like the common, the preferred has less security protection than the bond. But the potential of increases of market price of the common and its dividends paid from future growth of the company is lacking for the preferred. One big advantage that the preferred provides its issuer is that the preferred gets better equity credit at rating agencies than straight debt, since it is usually perpetual. Also, as pointed out above, certain types of preferred stock qualifies as Tier 1 capital. This allows financial institutions to satisfy regulatory requirements without diluting common shareholders. Said another way, through preferred stock, financial institutions are able to put on leverage while getting Tier 1 equity credit.

Suppose that an investor paid par ($100) today for a typical straight preferred. Such an investment would give a current yield of just over 6%. Now suppose that in a few years 10-year Treasuries were to yield 13+% to maturity, as they did in 1981; these preferreds would yield at least 13%, which would knock their market price down to $46, for a 54% loss. (In all probability, they would yield some 2% more than the Treasuries–or something like 15%, which would take the market price down to $40, for a 60% loss.)

The important difference between straight preferreds and Treasuries (or any investment-grade Federal agency or corporate bond) is that the bonds would move up to par as their maturity date is approached, whereas the straight preferred, having no maturity date, might remain at these $40 levels (or lower) for a very long time.

Advantages of straight preferreds posited by some advisers include higher yields and tax advantages (currently yield some 2% more than 10-year Treasuries, rank ahead of common stock in the case of bankruptcy, dividends are taxable at a maximum 15% rather than at ordinary income rates, as in the case of bond interest).

Source: http://en.wikipedia.org/wiki/Preferred_Stock

Earnings Tracker - FREE Accounting and Bookkeeping software tool for freelancers and contractors

In accounting terms, after all liabilities are paid, ownership equity is the remaining interest in assets. If valuations placed on assets do not exceed liabilities, negative equity exists.

Shareholders’ equity (or stockholders’ equity, shareholders’ funds,  shareholders’ capital employed) is this interest in remaining assets, spread among individual shareholders of common or preferred stock.

At the start of a business, owners put some funding into the business to finance assets. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for, the positive remainder is deemed the owner’s interest in the business.

This definition is helpful when a business is not paying its bills and gets liquidated, wound up, put into receivership or bankruptcy. Then, a series of creditors, ranked in priority sequence, have the first claim on the proceeds (e.g. asset sales), and ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such a case, creditors may not get enough money to pay their bills, and nothing is left over to reimburse owners’ equity. Thus owners’ equity is reduced to zero. Ownership equity is also known as risk capital, liable capital and equity.

Accounting
In financial accounting, it is the owners’ interest in the assets of the enterprise after deducting all its liabilities. It appears on the balance sheet, one of four financial statements.

Ownership equity includes both tangible and intangible items (such as brand names and reputation). In contrast, book value includes only the tangible assets.

Accounts listed under ownership equity include (example):

• preferred stock
• share capital, common stock
• capital surplus
• stock options
• retained earnings
• treasury stock
• reserve (Accounting)

Book value
The book value of equity will change in the case of the following events:

• Changes in the firm’s assets relative to its liabilities. For example, a profitable firm receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit it is increasing its assets.
• Depreciation. Equity will decrease, for example, when machinery depreciates, which is registered as a decline in the value of the asset, and on the liabilities side of the firm’s balance sheet as a decrease in shareholders’ equity.
• Issue of new equity in which the firm obtains new capital increases the total shareholders’ equity.
• Share repurchases, in which a firm gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholders’ equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares (increases the size of each share) in future income and distributions.
• Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income[citation needed](from the point of view of the common share owners).
• Other reasons. Assets and liabilities can change without any effect being measured in the Income Statement under certain circumstances; for example, changes in accounting rules may be applied retroactively. Sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value.

Shareholders’ equity
When the owners are shareholders, the interest can be called shareholders’ equity; the accounting remains the same, and it is ownership equity spread out among shareholders. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives. However, shareholders may allow different priority ranking among themselves by the use of share classes, and options. This complicates both analysis for stock valuation, and accounting.

The individual investor is interested not only in the total changes to equity, but also in the increase/decrease in the value of his own personal share of the equity. This reconciliation of equity should be done both in total and on a ‘per share’ basis.

Market value of shares
In the stock market, market price per share does not correspond to the equity per share calculated in the accounting statements. Stock valuations, often much higher, are based on other considerations related to the business’ operating cashflow, profits and future prospects; some factors are derived from the accounting statements. Thus, there is little or no correlation between the equity seen in financial statements and the stock valuation of the business.

Real estate equity
Individuals can also use market valuations to calculate equity in real estate. An owner refers to his or her equity in a property as the difference between the market price of a property and the liability attached to the property (mortgage or home equity loan).

Source: http://en.wikipedia.org/wiki/Ownership_equity

Earnings Tracker - FREE Accounting and bookkeeping software tool for contractors and freelancers

2008 has been a good year for Earnings Tracker. There have been three releases of the software:

• Version 3 (April)
• Version 4 (September)
• Version 5.1 (December)

Version 5.0 was initially released as a beta version  in November, but with the change in the VAT rate from 17.5% to 15%, a quick update was required. We decided to jump from Version 5.0 beta straight to Version 5.1 because there is a functional difference between the two versions: in Version 5.0, VAT is hard coded as 17.5%, whereas in Version 5.1 it is a variable that can be set to any value.

Since August, Earnings Tracker has been downloaded over 1200 times, and there are now around 50 registered online users. Although we know that Earnings Tracker will not solve all your accounting and bookkeeping issues, we hope that it is a useful software tool for contractors and freelancers.

Looking forward to 2009

2009 promises to be an exciting year for Earnings Tracker, with Version 6.0 planned for March. We are hoping to increase the number of registered users to around 300, and are aiming for a total of 5000 downloads by the end of the year.

I have a web site that in general gets around 30 or 40 visitors per day; some days the amount of traffic goes down a bit (normally over the weekend) and sometimes it goes up a bit (normally between Tuesday and Thursday). I can, however, almost at will, increase the volume of traffic from 30 visitors a day up to around 300 visitors per day!

The way I can do this is to generate a new web page or blog post, which covers a news item that is of interest to people. I then publicise the new page or post on reddit.com, and wait for the traffic to come rolling in. It’s fairly easy to come up with something news-worthy on a daily basis if you want to, and so long as what you write is original and isn’t plagiarised from someone else, there is no harm done.

So why don’t I do this everyday to ensure that instead of getting 30 visitors a day I’m getting 300? The answer is because the traffic obtained in this way isn’t normally what I would regard as ‘good’ traffic. I want people to come to my site and browse around the pages because they want to.

What I find with traffic that has been generated by publicising an article on reddit, for example, is that there is a very high bounce rate, and visitors who come via this route are not that interested in the rest of my site.

So, if you’re struggling to get decent traffic figures, give it a go.

Earnings Tracker - FREE Accounting and Bookkeeping Software Tool for Contractors and Freelancers

In financial accounting, a balance sheet or statement of financial position is a summary of a person’s or organization’s balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company’s financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time.

A company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth of the company and according to the accounting equation, net worth must equal assets minus liabilities.

Another way to look at the same equation is that assets equals liabilities plus owner’s equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner’s money (owner’s equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections “balancing”.

Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system.

A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

source : http://en.wikipedia.org/wiki/Balance_sheet

Earnings Tracker - FREE Accounting and Bookkeeping Software Tool for Contractors and Freelancers

To compliment Earnings Tracker, John Dixon Technology’s free accounting / bookkeeping software tool, we have recently launched Bank Account Tracker.

Bank Account Tracker lets you record all the transactions that take place on your company bank account.

To find out more about Bank Account Tracker, click the following link:

Bank Account Tracker

To find out more about Earnings Tracker, click the following link:

Earnings Tracker

Today, 1st December, sees the reduction in the UK VAT rate - down from 17.5% to 15%. Hurah! I hear you all cry, and yes, it is good news. Hopefully, the reduction will encourage people to spend a bit more, which in turn should help to stimulate the economy. There is a section of society though - the small business man - who may well see a small drop in revenue as a result of the change in the rate of VAT.  

In the UK there is a scheme called the VAT Flat Rate Scheme, which is aimed at businesses with a taxable turnover of less than £150,000 (before VAT). The idea of the scheme is to simplify VAT accounting for such companies. This is how the scheme works:

Assume a company has a taxable turnover of £10,000 in a particular month. The VAT payable to HM Customs and Excise is calculated as follows.

At 17.5%, the VAT payable would be:

£10,000 x 17.5% = £1750

£10,000 + £1750 = £11,750

£11,750 x 13% (VAT Flat Rate) = £1527.5 (this is how much has to be paid to HM Customs and Excise)

Difference between VAT charged and VAT payable:

£1750 - £1527.5 = £222.5

£222.5 represents the ‘VAT surplus’ the company can keep.

At 15%, the VAT payable would be:

£10,000 x 15% = £1500

£10,000 + £1500 = £11,500

£11,500 x 11.5% (new VAT Flat Rate for IT contractors) = £1322.5 (this is how much has to be paid to HM Customes and Excise)

Difference between VAT charged and VAT payable:

£1500 - £1322.5 = £177.5

£177.5 represents the ‘VAT surplus’ the company can keep.

So, based on a monthly revenue of £10,000, the VAT surplus that the company can keep has dropped from £222.5 to £177.5 - a reduction of £45. OK, this isn’t a huge amount of money, but it seems very convenient for the Chancellor that he is slightly better off, rather than it being the small business who is better off.

Earnings Tracker - Free Accounting / Bookkeeping Software Tool