Asked by Clara Candelario on Jun 09, 2024
Verified
Which statement regarding preferred stock is true?
A) A major disadvantage of financing with preferred stock is that preferred stockholders typically have super-normal voting rights.
B) Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common.
C) The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
D) One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income would be tax free.
Super-Normal Voting Rights
Voting rights that are greater than one vote per share, typically granted to certain class of shares to retain control in a company.
Preemptive Right
The right of existing shareholders to purchase additional shares in a company before the company offers them to the public, to maintain their proportionate ownership in the company.
After-Tax Yield
The profitability of an investment after all taxes have been deducted, providing a true picture of the investment's return.
- Identify the characteristics and differences between common and preferred stocks.
Verified Answer
SI
Shoubii I NarmadaJun 13, 2024
Final Answer :
B
Explanation :
Preferred stock is considered less risky than common stock, but it also has a lower expected after-tax yield because its dividends are fixed and do not increase as the company's profits do. Preferred stockholders do not generally have voting rights, and there is no preemptive right provision in all corporate charters. Dividends received from preferred stock are also taxed at the same rate as dividend income from common stock, rather than as interest income.
Learning Objectives
- Identify the characteristics and differences between common and preferred stocks.