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1. The Plex Corp issued cumulative preferred stock with a right of redemption in favor of...

1. The Plex Corp issued cumulative preferred stock with a right of redemption in favor of the corporation. Under what circumstances would the Plex Corp exercise its right of redemption?

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Answer #1

As the preference shares are cumulative , the preference dividends get accumulated if not paid regularly. If a company is in a situation that it has huge amount of unpaid cumulative preference dividends and it has cash flow problems and want to reduce the yearly fixed outgo of preference dividend , it can decide to redeem the preference shares.

Also in another situation, if the preference dividend is issued with put option to shareholders, the shareholders can exercise the option and force the company to redeem prerefernce shares. This gives an assued market to the shareholders.

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