12. Stockholders' Equity
Issuing Preferred Stock
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Now let's discuss a different class of stock ownership in the company, It's called preferred stock. So preferred stock is gonna be a special class of stock and it's it's more similar to, I want to say debt a little bit because they are the dividends they pay have like a percentage attached to them. And I'm gonna put like this approximately like that because you're gonna see similarities there. But it's not debt, it's not a liability. This is going to be equity in the company, but they're different from the common stockholders. The common stockholders have reigns over the retained earnings of the company and everything, the preferred stock holder. Well, they're gonna have preferences. So let's see what these preferences mean. First of all, they give up their voting rights. The common stockholders are the ones that vote for the board of directors will. Preferred stockholders have no voting rights. And generally this is the case that they have no voting rights um in selecting the board of directors. That's something they give up for these preferences. So what do they get first? They get liquidation preference when the company liquidates. So if they go bankrupt or whatever it is, they they are preferred to be repaid, they are repaid their investment before the common stockholders, right? So if they pay off all the liabilities, whatever money is left first goes to the preferred stockholders to make sure they get their investment back and then whatever is left over it goes to the common stockholders. So they have this liquidation preference over the common stockholders, but more importantly, is this idea of the dividends. This is what you're gonna deal with more in this class? The dividend preference. So the first thing is that they get paid the dividends first before the common stockholders. So what happens is if a company pays a dividend and there's preferred stockholders, well that dividend first goes to the preferred stockholders and then whatever's left over goes to the common stockholders, right? So they get this preference in getting their dividend paid first. Okay. And they also have um this dividend percentage because remember with the common stockholders they pay a dividend, hey they get whatever the dividend is, but here they have a specific percentage and this is why I was equivocal equivocating this to debt even though it's not debt, I don't want to confuse you there, this is still equity accounts, but there's gonna be some sort of percentage dividend that they get and it's a percentage of their par value. Okay so the difference here with the par value of preferred stock is that it's usually gonna be higher when we're talking about a par value for common stock, the common stock at a par value, maybe 50 cents $1 something very low. But a preferred share is gonna have a higher uh par value something between $10 100 dollars, $500. It's gonna be some higher number you're usually gonna see. Okay, so generally has a higher par value. So why don't we go ahead and dive into how we do the issuance of preferred stock. And you're gonna see the issuing of preferred stock is very similar to issuing common stock. We're gonna have a very similar entry where we're gonna receive cash and then we're gonna have our our credits to our preferred stock account rather than the common stock account. And we're also gonna have a pick just like we had with common stock we have a pick except it's a pic of preferred stock. So we want to be um Diligent in in marking it as preferred stock. A pick. So let's check it out. The apartment depot issued 10,000 shares of $100 par value, 8% preferred stock for $1,250,000. So notice this 8%, that's their dividend percentage. Okay and this is how you're usually gonna see it with preferred stock. It will have a dividend percentage. Or they could just tell you the dollar amount of the dividends. They could have said $8 preferred stock, right. 100 par value of $8 preferred stock. Well that means the dividends should be $8 for every 100. Okay. So what do they do here remember here they're issuing the stock. This has nothing to do with the payment of dividends. So all we need to think about is how much cash did we receive and then we need to increase our equity by that amount. So it tells us here that we received 1,250,000 in cash. So that's gonna be our debit to cash. And just like we had with common stock, we're gonna have very similar entry where our credit is to the equity accounts. So first we're gonna have a credit to preferred stock and we're gonna have a credit to a pick for any excess. Remember the par value goes to the preferred stock account and the excess over par value is going to go to a pick. Okay? And we'll label this a pick and you'll label it something like a pick, preferred stock. Okay. Just so you know that this apec is related to the preferred stock because this belongs to the preferred stockholders. Okay so there we go. We've got our entry set up just like we're used to we're gonna have the debit to cash and the credit to equity. So we just have to think about what are the amounts going to be. We know the cash we received is 1,250,000. That's gonna be our debit in this case. What our credit is going to be. Well the par value has to go to the preferred stock account. So let's go ahead and find out what that par value is uh what that you know what the par value amount is. So the preferred stock account is going to get The 10,000 shares times the par value of of $100 per share. Well, that comes out to one million, right? one million is going into the preferred stock account as the par value and any excess goes to a pick. So a pick is gonna be the 1.2 5,000,001 million, 250,000 minus the million that goes into preferred stock. Well, a pick is gonna be the 250,000 extra. Right? Just like we're used to and just like we did with common stock. So not much of a difference here when we do our issuance entry for preferred stock are dividends are going to be a little interesting because we have to calculate how much they're gonna get in dividends using the dividend percentage. Okay, So did we see happen here? We have our cash increase by the million, 250,000 that we received and we issued equity preferred stock, Preferred stock went up by one million and a pick for the preferred stock Went up by 250,000. Right, so those balance out there are assets went up by the same amount of our equity. Alright, let's take a pause here and let's see how the dividends work out with this dividend preference, where the preferred stock holders get paid first and common stockholders get the leftovers. Let's check it out
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Alright, let's try this dividends breakdown. The apartment depot currently has outstanding 10,000 shares of $100 par value, 8% preferred stock and 50,000 shares of 50 cent par value. Common stock. A lot of words there, you got to kind of decipher what's going on, right? This is all related to our preferred stock right here and then we're gonna have all this related to our common stock. Okay, so you're gonna want to keep track of these numbers. So the apartment depot declares and paid a dividend of 130,000. So we have $130,000 dividend. And remember the preferred stockholders are gonna get their dividend first and whatever is left over, it goes to the common stockholders, what is the amount received by preferred and common shareholders? So let's go ahead and find out in total what each one receives and then we'll break it down per share. So if we had 10,000 shares of 8% preferred stock, will those 10,000 shares? We need to find out what their par value is? Well, the way I like to do it actually is I like to take the $100 par value times the 8%. Remember this 8% is their dividend percentage, that's the percentage of their par value that they're they're due to receive as dividends. So $100 times 8%. Well that gives us $8 per share as a dividend. Right? So each share is entitled to an $8 dividend when they pay these dividends and they get an $8 per share, dividend times the 10,000 shares. Right? There's 10,000 shares of preferred stock. So there's gonna be $80,000 of dividends To preferred shareholders. Right? So the preferred shareholders get 80,000 of this $130,000 dividend. And everything else goes to the common stockholders. So the common stockholders get the leftovers right? They get what's left. So there's $130,000 dividend minus the 80,000 paid to preferred Right? They got paid first. So 50,000 is what's left over, and that's what gets paid to the common Common dividends. Right? So the common shareholders split this 50,000 left over. Cool. So that's how we find the total dividend that's paid to each of them, And that was 80,000 for the preferred And we had 50,000 for the common dividend. Right? Let me get out of the way here. So now that we know the total that each class got, it's easy to find the per share amount. Well, we already found the per share amount for for the preferred dividends, but we could do it again, just to be sure 80,000 was the total dividend divided by the 10,000 shares. Well, that comes out just like we saw before, $8 per share, right. And that makes sense because that's what they're They're 8% of the $100 gives them. So it's $8 per preferred share. Right? So each preferred shareholder will get an $8 dividend. What about the common dividend? They had $50,000 that was paid in dividends. And there were 50,000 shares. So Each share, $1 per common share. Right? So each common share gets $1. So you want to pay attention to how many shares of each class of stock there are, and that's how you divvy it up as the dividend per share. So there was a dollar per share, common dividend and an $8 per share preferred dividend. Alright, so this is how the preferences work. Remember when I told you up above the preferred stock has a preference, when the dividends get paid, they get paid first. Now let's say the dividend had only been instead of being $130,000? If the dividend had only been $60,000? Well, that whole 60,000 would have gone to preferred because they are due the 1st 80,000. Right? So if if the dividends had been $80,000,, the 1st 80,000 would have gone to preferred. And then that extra dollar would have been split among those common stockholders. Right? So that's how it works. The 1st 80,000. In this case We're always going to go to the preferred and whatever extra there is can go to the common. Now what if it was a million dollar dividend? The same thing. Right, 80,000. And then the whole 920,000 would go to the common stockholders. Cool, Alright, let's go ahead and move on to the next video.