Series 7 Chapter 1 Preferred Stock
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Preferred Stock - CORRECT ANSWER - Like a debt security, preferred shares generate
income from a fixed, regular monetary payment rather than a share in the company's financial
gains. Also like a bond, a preferred stock's market price fluctuates with interest rates and credit
worthiness, rather than with a company's earnings and losses. As a result, preferred stock is less
risky than common stock, but it offers less growth potential. It is more risky than debt, because
companies can miss their regular dividend payments without being in default.
why preferred? - CORRECT ANSWER - Preferred stock is "preferred" in the sense that
dividend payments are distributed to preferred stockholders before any dividends are paid to
common stockholders.
Preferred stock also has a higher claim on a corporation's dividends and residual assets during
bankruptcy than common stock
If a company is forced to liquidate, preferred stockholders have first claim to its remaining assets
compared to other equity holders. The price for these enhanced privileges is that preferred stocks
generally come without voting rights and have no real share in the company's profits
preferred dividends - CORRECT ANSWER - As with common stocks, dividend payments
for preferred shares often are paid quarterly. Unlike with common stocks, however, dividend
payments for preferred shares are determined when the stock is issued
fixed rate preferred stock - CORRECT ANSWER - may set its dividend payment at a
fixed-dollar value ($5), or the dividend may be based on a percentage of the par value of the
stock as stated on the stock certificate (5%)
floating rate - CORRECT ANSWER - will have an adjustable dividend based on a formula
tied to another benchmark, such as 3% above the interest rate on 90-day Treasury bills. The rate
, is reset quarterly, making the prices of adjustable-rate preferred less sensitive to interest rate
changes than fixed-rate preferred.
usually pays lower dividends
XYZ issues preferred stock with a 10% annual dividend. The par value on the preferred stock is
$100 per share. The share price of the preferred stock is $110, and the share price of the common
stock is $200. What is the quarterly per-share dividend on the preferred stock? - CORRECT
ANSWER - $2.50
liquidation - CORRECT ANSWER - receive preference over common stockholders if the
company goes bankrupt
when do companies issue preferred stock - CORRECT ANSWER - when the sale of bonds
or common stock is not feasible
M&A may issue preferred stock to use in exchange for the other company's assets so as not to
dilute it's own voting control
unstable earnings may issue preferred stock
company wishing to maintain liquidity
market demand
how much tax deduction does a corporation receive on preferred dividends - CORRECT
ANSWER - 70%
face value - CORRECT ANSWER - Most preferred stock is issued with a par value of $25,
$50, or $100. While $25 is the most common par value, on the Series 7 exam, you are likely to
see questions with a par value of $100 to make calculations easier.
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Preferred Stock - CORRECT ANSWER - Like a debt security, preferred shares generate
income from a fixed, regular monetary payment rather than a share in the company's financial
gains. Also like a bond, a preferred stock's market price fluctuates with interest rates and credit
worthiness, rather than with a company's earnings and losses. As a result, preferred stock is less
risky than common stock, but it offers less growth potential. It is more risky than debt, because
companies can miss their regular dividend payments without being in default.
why preferred? - CORRECT ANSWER - Preferred stock is "preferred" in the sense that
dividend payments are distributed to preferred stockholders before any dividends are paid to
common stockholders.
Preferred stock also has a higher claim on a corporation's dividends and residual assets during
bankruptcy than common stock
If a company is forced to liquidate, preferred stockholders have first claim to its remaining assets
compared to other equity holders. The price for these enhanced privileges is that preferred stocks
generally come without voting rights and have no real share in the company's profits
preferred dividends - CORRECT ANSWER - As with common stocks, dividend payments
for preferred shares often are paid quarterly. Unlike with common stocks, however, dividend
payments for preferred shares are determined when the stock is issued
fixed rate preferred stock - CORRECT ANSWER - may set its dividend payment at a
fixed-dollar value ($5), or the dividend may be based on a percentage of the par value of the
stock as stated on the stock certificate (5%)
floating rate - CORRECT ANSWER - will have an adjustable dividend based on a formula
tied to another benchmark, such as 3% above the interest rate on 90-day Treasury bills. The rate
, is reset quarterly, making the prices of adjustable-rate preferred less sensitive to interest rate
changes than fixed-rate preferred.
usually pays lower dividends
XYZ issues preferred stock with a 10% annual dividend. The par value on the preferred stock is
$100 per share. The share price of the preferred stock is $110, and the share price of the common
stock is $200. What is the quarterly per-share dividend on the preferred stock? - CORRECT
ANSWER - $2.50
liquidation - CORRECT ANSWER - receive preference over common stockholders if the
company goes bankrupt
when do companies issue preferred stock - CORRECT ANSWER - when the sale of bonds
or common stock is not feasible
M&A may issue preferred stock to use in exchange for the other company's assets so as not to
dilute it's own voting control
unstable earnings may issue preferred stock
company wishing to maintain liquidity
market demand
how much tax deduction does a corporation receive on preferred dividends - CORRECT
ANSWER - 70%
face value - CORRECT ANSWER - Most preferred stock is issued with a par value of $25,
$50, or $100. While $25 is the most common par value, on the Series 7 exam, you are likely to
see questions with a par value of $100 to make calculations easier.
