Question

Purple Pigeon Bird Seed Company currently pays preferred stockholders a dividend of $1.50 per share and common stockholders a dividend of $1.00 per share.


If the firm wants to raise the common stock dividend to $2.00 per share, it will also have to raise the preferred stock dividend to $2.00 per share.


Which type of provision does Purple Pigeon have in its preferred stock agreements?

Answer 1

Answer:

• Participating Provision

Explanation:

Purple Pigeon simply have a participating provision with preferred stockholders.

Meaning of Participating Provision: In a given financial year, a participating preferred stock may not only receive dividend that is legally  agreed in the share certificate, but also may receive auxiliary dividends based on fore determined conditions. Simply put that, participation provision in the common stock dividend is an extra incentive to stockholders for taking the risk and funding a company.

This provision where the stockholder not only receive the legally agreed dividend, but also participates in the 'upside' the common stock might experience.