## Last

25.11 -0.01 27.16 +0.24 50,10 -0,61 17.35 +0.65 36.26 - 0.06 31,75 -0.57 30,60 - 0,08 7.10+0.20 8.06 + 0.01 14.10 -0.18 20.70 - 0.57 23.14+0.09 8.10 - 0.06 8.80 + 0.20 10.81 -0.19 14.45 +0.04

moved to decimal pricing, which means that stock prices can be quoted in terms of dollars and cents, as in Figure 2.9.

The .64 figure in the listing for GE means that the last quarter's dividend was \$.16 a share, which is consistent with annual dividend payments of \$.16 X 4 = \$.64. This value corresponds to a dividend yield of 1.7%: Since GE stock is selling at 37.25 (the last recorded, or "close," price in the next-to-last column), the dividend yield is .64/37.25 = .017, or 1.7%.

The stock listings show that dividend yields vary widely among firms. High dividend-yield stocks are not necessarily better investments than low-yield stocks. Total return to an investor comes from both dividends and capital gains, or appreciation in the value of the stock. Low dividend-yield firms presumably offer greater prospects for capital gains, or else investors would not be willing to hold the low-yield firms in their portfolios.

The P/E ratio, or price-to-earnings ratio, is the ratio of the current stock price to last year's earnings. The P/E ratio tells us how much stock purchasers must pay per dollar of earnings the firm generates for each share. For GE, the ratio of price to earnings is 27. The P/E ratio also varies widely across firms. Where the dividend yield and P/E ratio are not reported in Figure 2.9, the firms have zero dividends, or zero or negative earnings. We shall have much to say about P/E ratios in Part Four.

The sales column ("Vol") shows that 151,392 hundred shares of GE were traded on this day. Shares commonly are traded in round lots of 100 shares each. Investors who wish to trade in smaller "odd lots" generally must pay higher commissions to their stockbrokers. The last, or closing, price of \$37.25 was up \$.10 from the closing price of the previous day.

### Preferred Stock

Preferred stock has features similar to both equity and debt. Like a bond, it promises to pay to its holder a fixed stream of income each year. In this sense, preferred stock is similar to an infinite-maturity bond, that is, a perpetuity. It also resembles a bond in that it does not give the holder voting power regarding the firm's management.

Preferred stock is an equity investment, however. The firm retains discretion to make the dividend payments to the preferred stockholders: It has no contractual obligation to pay those dividends. Instead, preferred dividends are usually cumulative; that is, unpaid dividends cumulate and must be paid in full before any dividends may be paid to holders of common stock. In contrast, the firm does have a contractual obligation to make the interest payments on the debt. Failure to make these payments sets off corporate bankruptcy proceedings.

Preferred stock also differs from bonds in terms of its tax treatment for the firm. Because preferred stock payments are treated as dividends rather than as interest on debt, they are not tax-deductible expenses for the firm. This disadvantage is largely offset by the fact that corporations may exclude 70% of dividends received from domestic corporations in the computation of their taxable income. Preferred stocks, therefore, make desirable fixed-income investments for some corporations.

Even though preferred stock ranks after bonds in terms of the priority of its claim to the assets of the firm in the event of corporate bankruptcy, preferred stock often sells at lower yields than corporate bonds. Presumably this reflects the value of the dividend exclusion, for risk considerations alone indicate that preferred stock ought to offer higher yields than bonds. Individual investors, who cannot use the 70% exclusion, generally will find preferred stock yields unattractive relative to those on other available assets.

Corporations issue preferred stock in variations similar to those of corporate bonds. Preferred stock can be callable by the issuing firm, in which case it is said to be redeemable. It also can be convertible into common stock at some specified conversion ratio. A relatively recent innovation in the market is adjustable-rate preferred stock, which, like adjustable-rate mortgages, ties the dividend rate to current market interest rates.

preferred stock

Nonvoting shares in a corporation, usually paying a fixed stream of dividends.

Part ONE Elements of Investments

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