Preferred Stock

Compared with common stock, straight preferred stock generally offers...

1. A.A fixed dividend and priority over common, usually without voting rightsCorrect — that is the classic profile of straight preferred stock.
2. B.Higher expected long-term capital gains and full voting rightsGrowth and voting are strengths of common stock, not preferred.
3. C.The last claim in liquidation, behind commonPreferred ranks ahead of common, not behind it.
4. D.A guaranteed dividend that can never be skippedEven preferred dividends are not truly guaranteed; the board can defer them.

Why: Straight preferred pays a fixed, stated dividend and ranks ahead of common for dividends and in liquidation, but it usually carries no voting rights.

Preferred stock generally:

1. A.Always carries voting controlPreferred stock is generally non-voting, and that is the trade the holder accepts in exchange for a fixed dividend and seniority over common. The word always also sets a bar that no share class clears.
2. B.Has unlimited dividend growthGrowing payouts are the common stockholder's upside, since a common dividend can be raised as earnings expand. A preferred dividend is fixed at issuance, which is what gives the security its bond-like behavior.
3. C.Ranks behind bondholders and common equallyHalf right in a useful way: preferred does rank behind bondholders. Where it breaks is the word equally, because preferred sits above common rather than alongside it. The order runs bonds, then preferred, then common, in both dividends and liquidation.
4. D.Pays a fixed dividend and ranks ahead of commonCorrect - fixed dividend, senior to common.

Why: Preferred stock pays a fixed dividend and ranks ahead of common stock in dividends and in liquidation.

Cumulative preferred stock means:

1. A.It converts to common automaticallyConversion into equity is the convertible feature, a separate provision that an issue may or may not carry. Cumulative concerns what happens to skipped dividends, not what the share can turn into.
2. B.Dividends can never be missedThis overstates the protection. A cumulative preferred dividend can certainly be skipped when the board declines to declare it. What cumulative guarantees is that the skipped amount is recorded as arrears and must be cleared before common receives anything.
3. C.It has voting rights alwaysVoting is generally what a preferred holder gives up in exchange for dividend priority. Some issues grant limited voting rights in narrow circumstances, but that is a separate feature, and cumulative describes dividend treatment rather than governance.
4. D.Missed dividends accumulate and are paid before common dividendsCorrect - arrears must be cleared first.

Why: Unpaid (in-arrears) dividends on cumulative preferred accumulate and must be paid before any common dividend.

A company suspends its preferred dividend for two years, then resumes paying. Holders of CUMULATIVE preferred stock:

1. A.Receive the skipped dividends plus a share of the company's profits above a stated levelSharing in excess profits is the participating feature, which is separate from the cumulative feature.
2. B.May convert their shares into common stock to recover the skipped dividendsConversion is a separate feature found on convertible preferred, and it is not a remedy for arrears.
3. C.Must receive the two years of skipped dividends before any common dividend is paidCorrect. Arrears accumulate and must be cleared ahead of any common distribution.
4. D.Receive only the current year's dividend; the skipped years are permanently lostThat describes straight, or noncumulative, preferred. Missed dividends there are gone for good.

Why: Cumulative preferred accumulates any skipped dividends as arrears. Before the company may pay anything to common shareholders, it must first pay all accumulated arrears plus the current preferred dividend. That is the entire protection cumulative preferred offers, and it is why it usually carries a lower yield than straight preferred.