Question

Identify which characteristic describes common stock (CS) or preferred stock (PS) financing. May have cumulative and participating features. May be convertible into another type of security. Last to receive distribution of assets in the event of bankruptcy and liquidation. Places minimum operating constraints on the firm. Group of answer choices 1

Answer 1

Common Stock (CS)

• Places minimum operating constraints on the firm. - Common stock does not have to be paid dividends so place no obligations on the firm.
• Last to receive distribution of assets in the event of bankruptcy and liquidation. - CS is paid last when assets are liquidated as debt and preferred stockholders are paid off first.

Preferred Stock (PS)

• May have cumulative and participating features. - Can be cumulative which means that if dividends are not paid in one year, the dividend will be accrued and eventually paid or they can be Participating which means that they can receive more dividends than they are entitled to.
• May be convertible into another type of security. - Preference shares can be converted into other securities such as Common stock.