Preferred Stock Flashcards
All of the following statements are true about preferred stock EXCEPT:
A. Preferred dividends are paid before common
B. In most cases dividends are paid semi-annually
C. Corporations must pay preferred dividends
D. Preferred shareholders are paid before common shareholders upon liquidation of a corporation
The best answer is C.
Preferred stock has preference over common as to the payments of dividends and as to assets upon liquidation. Preferred dividends are, in most cases, paid semi-annually. The Corporation will only pay the preferred dividend if the Board of Directors decides. There is no legal obligation to pay the preferred, however, if it is not paid, investors will not find the stock attractive and won’t invest in it.
Which statement is TRUE when comparing preferred stock to common stock:
A. Preferred dividends are paid before common
B. Both preferred and common stock has voting rights.
C. Preferred shareholders have a junior claim to assets upon liquidation after common shareholders
D. Preferred interest is paid semi-annually
The best answer is A.
Preferred stock has preference over common as to the payment of dividends and as to assets upon liquidation. Preferred dividends (NOT interest) are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly. Preferred stock lacks voting rights.
Dividends on preferred stock may be paid in:
A. Cash
B. Common shares of the same issuer
C. Common shares of another issuer
D. Preferred stock of the same issuer
The best answer is A.
Dividends on preferred stock are paid solely in cash. Dividends on common stock may be paid in cash; stock; stock of another company (such as shares of a subsidiary company) or products of that company.
Dividends on preferred stock may only be paid in:
A. Common shares of another issuer
B. Common shares of the same issuer
C. Cash
D. Preferred stock of the same issuer
The best answer is C.
Dividends on preferred stock are paid solely in cash. Common stock dividends may be paid in cash, stock, stock of another company (i.e. subsidiary), or products of that company.
A customer buys 100 shares of preferred at $51 per share. The par value is $50. The dividend rate is 8%. Each dividend payment would be:
A. $200
B. $400
C. $600
D. $800
The best answer is A.
The annual rate is 8% x $50 par value = $4 per share x 100 shares = $400. Since preferred dividends are paid semi-annually, each payment is for $200.
A customer buys 100 shares of preferred at $80 per share. The par value is $100. The dividend rate is 10%. The customer will receive how much in each dividend payment?
A. $400
B. $500
C. $800
D. $1,000
The best answer is B.
Preferred dividends are based on a stated percentage of par value. The stated rate is 10% of $100 par = $10 annual dividend per preferred share. Since there are 100 shares, the annual dividend is $1,000. Remember, though, that preferred dividends are paid twice a year, so each payment will be for $500.
A customer buys 100 shares of preferred at $101 per share. The par value is $100. The dividend rate is 8%. Each dividend payment will be:
A. $80
B. $400
C. $800
D. $808
The best answer is B.
The annual rate is 8% x $100 par value = $8 per share x the number of shares = $800. Since preferred dividends are paid semi-annually, each payment would be $400.
Which statement is TRUE about preferred stock?
A. When interest rates rise, preferred stock prices rise
B. When interest rates fall preferred stock prices fall
C. Preferred stock is unaffected by interest rate swings
D. When interest rates rise, preferred stock prices fall
The best answer is D.
Preferred stock is a fixed income security, and hence, when market interest rates move, the only way for the yield on the security to adjust to the market is to have the price change. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security.
ABC 8% $100 par preferred is trading at $105 in the market. The current yield is:
A. 6.6%
B. 7.6%
C. 8.6%
D. 10.6%
The best answer is B.
The formula for current yield is:
Annual Income
———————- = Current Yield
Market Price
$8
——– = 7.6%
$105
ABC 10% $100 par preferred is trading at $115 in the market. The current yield is:
A. 8.7%
B. 9.5%
C. 10%
D. 11.5%
The best answer is A.
The formula for current yield is:
Annual Income
———————- = Current Yield
Market Price
$10
——– = 8.7%
$115
ABC 8% $100 par preferred is trading at $120 in the market. The current yield is:
A. 6.7%
B. 8.6%
C. 10.6%
D. 60.6%
The best answer is A.
The formula for current yield is:
Annual Income
———————- = Current Yield
Market Price
$8
——– = 6.7%
$120
XYZ Company has issued 10%, $100 par non-cumulative preferred stock. Two years ago, XYZ omitted its preferred dividend. Last year, it paid a preferred dividend of $5 per share. This year, XYZ wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of:
A. 0
B. $5
C. $10
D. $15
The best answer is C.
Since the preferred stock is noncumulative, to make a dividend distribution to common shareholders, the company need only make this year’s preferred dividend distribution. The stated dividend rate on the preferred is 10% based on $100 par, so $10 of preferred dividends must be paid per share. If this preferred were cumulative, then all omitted dividends must be paid before a distribution can be made to common. Please note that almost all preferred stock issues are cumulative - but non-cumulative issues must still be known for the exam.
ABC Company has issued 8%, $100 par, cumulative preferred stock. Two years ago, ABC paid a 4% preferred dividend. Last year, ABC paid a 5% preferred stock dividend. This year, ABC wishes to pay a common dividend. If the preferred stock is now trading at $94, a customer who owns 100 shares of the company’s preferred stock will receive:
A. $700
B. $800
C. $1,000
D. $1,500
The best answer is D.
Since this is cumulative preferred stock, all missed dividends must be paid before a common dividend can be paid. Two years ago, 4% was missed; last year 3% was missed; and this year’s preferred dividend of 8% must be paid before the common dividend is paid. The total preferred dividend to be paid is 15%.
ABC Company has outstanding 6% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 4% preferred stock dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive:
A. 0%
B. 2%
C. 6%
D. 8%
The best answer is D.
On cumulative preferred stock, all back unpaid dividends PLUS this year’s preferred dividend must be paid before a common dividend is paid. Thus, 2 years ago the full 6% preferred dividend was paid, so there is no arrearage; last year only 4% was paid, so 2% was missed. Before a common dividend can be paid this year, the missing 2% plus this year’s 6% preferred dividend, or a total of 8% must be paid.
ABC Company has issued 10% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 7% preferred dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive:
A. 0%
B. 7%
C. 10%
D. 17%
The best answer is D.
Since this is cumulative preferred stock, all missed dividends must be paid before a common dividend can be paid. Two years ago, 4% was missed; last year 3% was missed; and this year’s preferred dividend of 10% must be paid before the common dividend is paid. The total preferred dividend to be paid is 17%.
