Series 7 Chapter 1 Preferred Stock
Exam 2025 Questions and Answers
Preferred Stock - 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? - 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 - 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
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 1
, fixed rate preferred stock - 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 - 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? - ANSWER✔✔-$2.50
liquidation - ANSWER✔✔-receive preference over common stockholders if the
company goes bankrupt
when do companies issue preferred stock - 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 -
ANSWER✔✔-70%
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 2
Exam 2025 Questions and Answers
Preferred Stock - 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? - 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 - 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
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 1
, fixed rate preferred stock - 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 - 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? - ANSWER✔✔-$2.50
liquidation - ANSWER✔✔-receive preference over common stockholders if the
company goes bankrupt
when do companies issue preferred stock - 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 -
ANSWER✔✔-70%
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 2
