Question

Which of the following statements is true? a) Common stock takes preference over preferred stock in...

Which of the following statements is true?

a) Common stock takes preference over preferred stock in bankruptcy proceedings

b) Preferred stock is largely owned by other companies rather than individual investors

c) All of these statements are true

d) Both common and preferred shareholders vote to select the firm’s board of directors

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Answer #1

Sol:

Preferred stock is largely owned by other companies rather than individual investors is true

Answer is b

Preferred stock are less liquid in nature as they are issued in smaller quantity then common stock and also because they are largely owned by other companies rather than individual investors. The main reason to hold a preferred stock by other companies is that most of the dividend income received can be deducted from tax which is not in the case of an individual investor. Also due to attractive and good dividend, a large portion of preference shares are bought by companies at the time of issue, which leads to a very small portion of shares left for individual investors.

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