TellTrue Corporation has preferred stock which paid an annual dividend in 2009 o
ID: 2629469 • Letter: T
Question
TellTrue Corporation has preferred stock which paid an annual dividend in 2009 of $5 per share. TellTrue also has common stock which paid a dividend in 2009 of $5. Which of the following statements is MOST correct concerning TellTrue stock?
A. If the required return on the preferred stock is the same as the required return on the common stock, then the price of preferred stock should equal the price of the common stock if markets are efficient.
B. The price of the preferred stock should equal the price of the common stock since the dividends are the same.
C. The price of the preferred stock is expected to be higher than the price of the common stock because the required return on preferred stock is higher than the required return on common stock.
D. The price of the common stock could be higher than the price of the preferred stock if the common stock dividends are expected to grow in the future.
Explanation / Answer
A. If the required return on the preferred stock is the same as the required return on the common stock, then the price of preferred stock should equal the price of the common stock if markets are efficient.
The investment bank deals with large investors, mostly institutions like mutual funds, insurance companies, and pension funds, each time it brings new securities to market. In contrast, the investment bank issues new securities for a corporation infrequently. The institutional investor clients of the bank want the lowest price possible for the securities they are buying, but the issuing firm wants a high price so that it raises more money. Therefore, there is a natural conflict of interest between the two client groups that investment banks serve. This makes the relationship between a corporation and its investment bank rather tense at times.
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