Which of the following statements is CORRECT? A) Preferred stockholders have a p

Question

Which of the following statements is CORRECT?
A) Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
B) The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
C) Corporations cannot buy the preferred stocks of other corporations.
D) Preferred dividends are not generally cumulative.
E) A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?


A B
Required return 10% 12%
Market price $25 $40
Expected growth 7% 9%

A) These two stocks should have the same price.
B) These two stocks must have the same dividend yield.
C) These two stocks should have the same expected return.
D) These two stocks must have the same expected capital gains yield.
E) These two stocks must have the same expected year-end dividend.

Explanation / Answer

B) The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. C) These two stocks should have the same expected return.

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