Question

1 . Which of the following are characteristics of preferred stock?

I) It pays its holder a fixed amount of income each year at the discretion of its managers.
II) It gives its holder voting power in the firm.
III) Its dividends are usually cumulative.
IV) Failure to pay dividends may result in bankruptcy proceedings.

A. I, III, and IV
B. I, II, and III
C. I and III
D. I, II, and IV
E. I, II, III, and IV

Answer 1

Following are some of the main characteristics of preferred stock:

1) Preferred stock has a fixed rate of dividend, which is specified as a percentage of the par value. Also, preference dividends must be paid before ordinary dividends.

2) This type of stock does not allot voting rights to the stockholders.

3) Most preferred stocks are cumulative. If the company fails to pay dividends due each year, the unpaid dividends will be accumulated and shall be paid in a future period.

4) Preferred stocks are less risky than common stocks. In case of bankruptcy or liquidation, the preferred stockholders are paid before the common stockholders.

5) Some preferred stocks are convertible giving the holder the option to convert the shares into a certain number of common stocks on a specific date.

6) Some preferred stocks are redeemable giving the company the right to buy back them at an agreed time and price.

In questions 1 and 3 rd are the characteristics of

preferred stock and not the 2 an 4 th

Hence finally answer " C" I and III are correct option.