Which of the following statements is CORRECT?
A) A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
B) Preferred stock is normally expected to provide steadier,more reliable income to investors than the same firm's common stock.As a result,the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
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 earned on bonds is tax free.
E) One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

Question

Quizplus · Accepted Answer

Preferred stock is generally considered less risky than common stock and therefore, pays a lower expected return. However, it provides steadier, more reliable income to investors. Thus, the expected after-tax yield on preferred stock is lower than the after-tax expected return on common stock. All other statements are incorrect.

Which of the Following Statements Is CORRECT