Question

An individual who owns preferred stock receives a larger dividend than stated on its face. The preferred stock could be (select all that apply):

a. cumulative preferred
b. Participating preferred
c. Preemptive preferred
d. Secured preferred

Answer 1

Preferred stock typically has a set dividend rate, but sometimes, the board of directors of profitable companies may choose to pay higher dividends. The decisions on dividends are influenced by the company's performance and the need to balance expansion with shareholder returns.

Step-by-step explanation:

Preferred stock often comes with a stipulated dividend rate, which outlines the expected dividends a shareholder will receive. This rate is typically higher than common stock dividends because preferred shareholders forgo some of the growth potential and voting rights that come with common stock. When a company is profitable, the board of directors may decide to issue a dividend payout that is higher than the stated rate on preferred stock. This can happen when a firm is especially successful and the directors choose to distribute a larger percent of the profits to shareholders.

The decisions about when to issue stock, pay dividends, or reinvest profits are generally made by the board of directors of the company, which can be a private or public firm. They have to balance the benefit of issuing stock - which includes increased visibility in financial markets and access to capital for expansion - against the costs, which include legal and banking fees and compliance with SEC regulations.

Hence, while the term 'secured preferred' does not directly explain the larger dividend, it's possible that the preferred stock in question has provisions allowing for additional dividends if the company performs exceptionally well.