Question

The term? "preferred" comes from the fact that preferred shareholders? receive, on? average, a higher rate of return than common shareholders even though they have less risk

1)True

2)False

Answer 1

2)False

Preferred shareholders receive fixed rate of return.It does not mean that they receive,on average,higher rate of return than common shareholders.They only have preference to receive income prior to common shareholders.

Further,Income of preferred shareholders is limited to their rate of return.But, common shareholders does not have any such limitation.After payig a certain fixed amount to preferred stockholders, all remaining incomes are of common shareholders.