Question 1

Common features of preferred stock include&#8203;&#10;A) variable, cumulative dividends&#8203;&#10;B) &#8203;variable, non&#8209;cumulative dividends&#10;C) &#8203;fixed, non&#8209;cumulative dividends&#10;D) &#8203;fixed, cumulative dividends

Accepted Answer

Preferred stock typically pays fixed dividends, which are usually non-cumulative or cumulative. Cumulative dividends mean that if the company skips a dividend payment, it must be paid before any dividends can be paid to common stockholders. Non-cumulative dividends mean that skipped payments do not accumulate and do not have to be paid in the future. Since the question asks for common features, we can eliminate options A and B, which have variable dividends. Therefore, option D is the best choice as it is fixed, which is common for preferred stock, and it is also cumulative, which is another common feature of preferred stock.

Question 2

Some preferred stocks are not perpetual and must be retired at some specified time period.&#8203;

Accepted Answer

Some preferred stocks have a stated maturity date, after which the issuer must retire the stock by paying the face value of the stock to the shareholders. These stocks are not perpetual like common stocks.

Question 3

The dividend paid by a preferred stock is usually&#8203;&#10;A) &#8203;tax deductible&#10;B) &#8203;variable&#10;C) &#8203;paid in stock&#10;D) &#8203;fixed

Accepted Answer

Preferred stock dividends are fixed, meaning that they are paid at a consistent rate and are not subject to fluctuation like common stock dividends. This is one of the benefits of investing in preferred stock, as it provides a dependable stream of income for investors.

Question 4

Preferred stock dividends are not a legal obligation of the firm.&#8203;

Accepted Answer

Preferred stock dividends are not considered a legal obligation of the firm, unlike bond interest payments. The company has the discretion to pay or not pay dividends on preferred stock depending on its financial performance and other factors.

Question 5

One measure of the safety of a preferred stock's dividend is the ratio of dividends to earnings before interest and taxes.&#8203;

Accepted Answer

The ratio of dividends to earnings before interest and taxes is not a measure of the safety of a preferred stock's dividend. Rather, it is a measure of the dividend payout ratio, which is the proportion of earnings paid out as dividends. A lower dividend payout ratio may indicate a safer dividend, as it suggests the company has more earnings available to cover its dividend payments. However, other factors such as the company's financial strength, industry trends, and economic conditions also affect the safety of a preferred stock's dividend.

Question 6

What is the value of a preferred stock that pays an annual dividend of $3 a share and competitive yields are 5%, 10%, and 15%?&#8203;

Accepted Answer

The answer of What is the value of a preferred...

Question 7

A firm has the following preferred stocks outstanding:
PFD A: $40 annual dividend, $1,000 par value, no maturity
PFD B: $95 annual dividend, $1,000 par value, maturity after twenty-five years
If comparable yields are 9 percent, what should be the price of each preferred stock?

Accepted Answer

The answer of A firm has the following preferred stocks...

Question 8

Common features of preferred stock include&#8203;&#10;A) &#8203;fixed, cumulative dividends&#10;B) &#8203;variable, cumulative dividends&#10;C) &#8203;fixed, non&#8209;cumulative dividends&#10;D) &#8203;variable, non&#8209;cumulative dividends

Accepted Answer

Preferred stock typically pays fixed dividends, and these dividends may be cumulative, meaning that if the company is unable to make a dividend payment in a given period, the unpaid amount will accumulate and must be paid before common stock dividends can be paid. Variable dividends are less common for preferred stock. Non-cumulative dividends mean that if the company is unable to make a dividend payment in a given period, the unpaid amount does not carry over to future periods.

Question 9

If a firm misses a payment for a non-cumulative preferred stock, the dividend never has to be paid.&#8203;

Accepted Answer

This statement is true. Non-cumulative preferred stock is a type of preferred stock where missed dividend payments are not accrued or cumulated. If a firm misses a payment, the dividend obligation is cancelled and the dividends do not have to be paid to shareholders in the future.

Question 10

If interest rates increase,&#8203;&#10;A) &#8203;the prices of bonds and preferred stock increase&#10;B) &#8203;the price of bonds increases but the price of preferred stock decreases&#10;C) &#8203;the prices of bonds and preferred stock decline&#10;D) the price of bonds decreases but the price of preferred stock increases

Accepted Answer

When interest rates increase, the prices of existing bonds and preferred stocks typically decline. This is because new bonds and preferred stocks would be issued at the higher current interest rates, making the existing ones with lower interest payments less attractive, hence decreasing their market value.

Question 11

&#8203;Preferred stock and bonds are similar because&#10;A) &#8203;they both have voting power&#10;B) interest and dividend payments are legal obligations&#10;C) &#8203;neither interest nor dividends are tax deductible&#10;D) &#8203;both are a source of financial leverage

Accepted Answer

The answer of &#8203;Preferred stock and bonds are similar because&#10;A)...

Question 12

One measure of the safety of a preferred stock's dividend is the earnings-per-preferred share.&#8203;

Accepted Answer

The answer of One measure of the safety of a...

Question 13

Arrearage means that a cumulative preferred stock's dividend is not being paid.&#8203;

Accepted Answer

The answer of Arrearage means that a cumulative preferred stock's...

Question 14

Preferred stock dividends are usually fixed.&#8203;

Accepted Answer

The answer of Preferred stock dividends are usually fixed.&#8203;...

Question 15

Preferred stock dividends are paid after interest but before dividends to common stock.

Accepted Answer

The answer of Preferred stock dividends are paid after interest...

Question 16

Preferred stock dividends are not a tax deductible expense for the firm.&#8203;

Accepted Answer

The answer of Preferred stock dividends are not a tax...

Question 17

&#8203;Which of the following is not equity?&#10;A) &#8203;paid&#8209;in capital&#10;B) &#8203;retained earnings&#10;C) &#8203;preferred stock&#10;D) &#8203;debentures

Accepted Answer

The answer of &#8203;Which of the following is not equity?&#10;A)...

Deck 14: Preferred Stock