Final answer:
In a liquidation scenario, preferred shareholders have a higher claim to assets than common shareholders but are subordinate to creditors. They receive payment after debts are settled but before common shareholders, bearing in mind that they may get less than their full share value or none if funds are insufficient.
Step-by-step explanation:
In the case of liquidation, preferred shareholders rank above common shareholders but below creditors, including bondholders and any others with a prior claim on the assets of the company. When a company is liquidated, its assets are sold and the proceeds are used to pay off its debts. Any remaining funds after the creditors have been paid will then be allocated to the shareholders. Preferred shareholders receive payments before common shareholders because of their preferential treatment in the capital structure. It is critical to understand that if the liquidation proceeds do not suffice to cover all the outstanding debts, preferred shareholders may receive less than the full value of their shares or possibly no return at all, after all creditor claims have been satisfied. This hierarchy is important for potential investors to know when they are considering the risk profile of different types of shares within a company.