Preferred stock and common stock issued by the same firm will have the same required return because the riskiness of the firm's cash flows is the same for both securities.

Question

Quizplus · Accepted Answer

Preferred stock is less risky compared to common stock as it has a fixed dividend and priority in receiving dividends and assets in case of liquidation. Therefore, investors would require a lower return on preferred stock compared to common stock.

Preferred Stock and Common Stock Issued by the Same Firm