Question

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 the preferred is lower than the after-tax expected return on the common stock.

A. True
B. False

Answer 1

The statement about preferred stock providing more reliable income than common stock and having a lower expected after-tax yield is true. Preferred stock's stability contrasts with the potential high return but higher risk associated with common stock, reflecting the principle that higher risk typically accompanies higher expected returns. Therefore, the given statement is true.

Step-by-step explanation:

The statement that preferred stock is normally expected to provide steadier, more reliable income than the same firm's common stock is true. Investors usually expect a lower after-tax yield from preferred stock compared to common stock due to its lower risk profile. Preferred stock typically pays fixed dividends and has priority over common stock in the event of bankruptcy, which contributes to its stability and reliability.

When assessing different types of investments, it is important to recognize the relationship between risk and expected return. Over time, stocks have provided higher average returns than bonds, and bonds higher than a savings account. However, with the higher return potential also comes greater volatility and risk of loss, as the stock market can fluctuate significantly, as seen with the S&P 500's performance in 2008 and 2009.