Question

1. Because of its risk characteristics compared to ordinary preferred stock, cumulative preferred (of the same firm) should present a ______ expected return:

   		a) higher
   		b) lower
   		c) same

Answer 1

Correct Answer is option B
Cummulative preference share yield is lower as compared to ordinary preference stock.
Cummulative preference stock - When the company iis not in a position to pay the dividend of preference share there dividend is due and the company will pay the cummulative dividend  next year(previoius year + current year).
But in Ordinary Preference stock they don't have that benefit, if the dividend is lapse in a year they will not be cummulative to next year.
Therefore ordinary Preference stock demand a higher return.

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