Final answer:
The statement is true; corporations benefit from investing in floating-rate preferred stock due to stable pricing suitable for liquidity needs and a significant tax exemption on dividends, which enhances the overall investment return. The correct option is A.
Step-by-step explanation:
The statement that corporations that invest surplus funds in floating-rate preferred stock benefit from a relatively stable price and a 70% tax exemption on preferred dividends is true. Floating-rate preferred stock provides a variable dividend rate, which helps protect against inflation and offers stability in interest rate fluctuations.
Since the price of floating-rate preferred stocks tends to be more stable, they are more desirable for those looking to maintain liquidity in their portfolio.
Furthermore, there is indeed a tax advantage for corporations receiving dividends from preferred stock, which allows for a substantial portion, commonly up to 70%, to be exempt from taxation, improving the after-tax returns on these investments.
This financial strategy is important for corporate investors as it balances the need for liquidity and minimized tax liability.
Investing in floating-rate preferred stock can be looked at as part of a broader strategy within corporate finance, where firms have to weigh different capital funding options, such as borrowing, issuing bonds, or issuing stock.
Each option carries its own set of advantages and disadvantages, with direct implications for company control, cash flow obligations, and profitability. The correct option is A.