Power Financial Corporation is a Canadian diversified international management company that holds interests, directly or indirectly, in companies that are active in the financial services industry in Canada, the United States, and Europe. The company’s 2012 annual report included the following information about specific issues of preferred shares:
20. Share Capital
In the second quarter of 2010, the Corporation issued 11,200,000 4.40% Non-Cumulative 5- Year Rate Reset First Preferred Shares, Series P for cash proceeds of $ 280 million. The 4.40% Non-Cumulative First Preferred Shares, Series P are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $ 1.10 per share per annum. On January 31, 2016, and on January 31 every five years thereafter, the Corporation may redeem for cash the Series P First Preferred Shares in whole or in part, at the Corporation’s option, at $ 25.00 per share plus all declared and unpaid dividends to the date fixed for redemption, or the Series P First Preferred Shares are convertible to Non-Cumulative Floating Rate First Preferred Shares, Series Q, at the option of the holders on January 31, 2016, or on January 31 every five years thereafter. Transaction costs incurred in connection with the Series P First Preferred Shares of $ 8 million were charged to retained earnings.
1. Identify the various characteristics of these preferred shares.
2. Based on the characteristics of these shares, should they be classified as debt or equity? Explain.