Question

1. Some preferred stocks are "participating preferreds," allowing for an increase in the preferred stock dividend when additional profits are available after common stock dividends have been paid. True or False

2. Floating rate preferred stock would be ideal to have when the stock price fluctuates and when there are tax benefits to owning preferred stock. True or False

Answer 1

Answer(1): False.

Participating preferred stock are the stocks that are given preference in paying the dividend before it is paid to common shareholders. They also get preference in repayment of capital at the time of liquidation. Preferred shareholders get fixed amount of dividend.

When company gets profit, it firstly distributes dividend to preferred shareholders at a fixed amount and then remaining amount is distributed to the common shareholders. Preferred shareholders do not have voting rights.

Answer(2): False.

Floating rate preferred stock- It is the preferred stock that pays revised dividend time to time. The dividend is not fixed as it is for Preferred stock. Floating rate preferred stock reset the dividend time to time based on predetermined formula. They have stable price, stock prices do not fluctuate much because when common share price drops, bond price increases.