Question

Distinguish between participating preferred stock and nonparticipating preferred stock?

Answer 1

Participating preferred stock, after receipt of its preferential return, also shares with the common stock (on an as-converted to common stock basis) in any remaining available deal proceeds, while non-participating preferred stock does not.

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Answer 2

Participating preferred stock holders can receive fixed dividends plus extra earnings, while nonparticipating preferred stock holders only get fixed dividends.

Step-by-step explanation:

The distinction between participating preferred stock and nonparticipating preferred stock is a key concept in corporate finance. Participating preferred stock allows shareholders not only to receive fixed dividends but also to participate in additional earnings, often after a certain condition is met, such as a preset dividend paid to common shareholders. On the other hand, nonparticipating preferred stockholders are entitled to receive only the fixed dividend and do not have the right to participate in any extra profits the company might earn.

Decision-making regarding the issuance of stock, payment of dividends, or reinvestment of profits is generally the responsibility of the firm's management and board of directors. In the case of private firms, these decisions might be made by a small group of individuals or even a single owner, while public firms are typically subject to the influence of many shareholders and must adhere to stricter regulations and standards of transparency.