Final answer:
The board of directors decides when to issue stock or pay dividends, and this differs for private and public companies. Preferred shareholders are paid first, with participating preferred stockholders potentially receiving additional profits after their base dividends. The payout order prioritizes these shareholders above common stockholders but below creditors and bondholders.
Step-by-step explanation:
When dealing with the distribution of dividends, especially in the context of participating preferred stock, it is important to understand the order in which dividends are paid out. Typically, the board of directors of a company makes decisions concerning issuing stock, paying dividends, or reinvesting profits. These decisions differ based on whether the company is private or public. For companies with participating preferred stock, these stockholders have priority in dividend distribution.
Before any dividends are paid to common shareholders, preferred shareholders receive their guaranteed dividend. Participating preferred shareholders not only receive this fixed dividend but may also participate in additional profits, much like common shareholders, once the minimum preferred dividends have been paid out. In essence, after the regular dividends are paid to the preferred stockholders, any remaining profits meant for dividends can then be shared with these participating holders in addition to their base dividend amount.
This structure incentivizes investors to hold participating preferred stock, as they get the security of preferred dividends with the potential for additional earnings. Yet, they rank below creditors and bondholders in case of liquidation but above common stockholders in the distribution of dividends and assets. Understanding the hierarchy of payouts is crucial for potential investors and company decision-makers alike.