Question

Which of the following statements is CORRECT? Group of answer choices A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. 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. One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.

Answer 1

The most correct statement is

"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"

Explanation: A preferred stock is stock that gives the holder the right to a fixed dividend, whose payment consideration come first before the ordinary share dividends. This makes it a reliable income to investors, because their are considered first with a fixed dividends. Because the preferred stock are considered first, their share of dividends which is fixed will be much, therefore the after tax payment will be lower, when compared to the after tax payment of the common stock.