When the dividend rate on preferred stock is less than the rate of return earned on a corporation's assets,it is called:
A)Financial leverage.
B)Discount on stock.
C)Premium on stock.
D)Preemptive right.
E)Capital gain.

Question

Quizplus · Accepted Answer

This situation is known as "preferred stock drag" and it means that the company is generating a higher rate of return on its assets than the rate it is paying out to preferred stockholders. This can be advantageous for the company, as it allows them to keep more of their earnings to reinvest in the business or distribute to common stockholders. However, it can be frustrating for preferred stockholders who may feel they are not getting a fair return on their investment. This is the opposite of "financial leverage," which occurs when a company borrows money at a lower interest rate than its rate of return on assets, resulting in higher earnings for shareholders. The other answer choices are not relevant to this scenario.

When the Dividend Rate on Preferred Stock Is Less Than