Which of the following statements is CORRECT? A. One of the disadvantages to a c

Question

Which of the following statements is CORRECT?

A. One of the disadvantages to a corporation owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income would be tax free.

B. A major disadvantage of financing with preferred stock is that preferred stockholders typically have super-normal voting rights.

C. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and as a result, the expected after-tax yield on preferred is lower than the after-tax expected return on the common since common stocks are riskier.

D. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.

E. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

Explanation / Answer

C. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and as a result, the expected after-tax yield on preferred is lower than the after-tax expected return on the common since common stocks are riskier.

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