Question

How can a firm effectively incorporate a maturity provision within a preferred stock issue? By including a preemptive right By including a voting provision By including a participating provision By including a call provision By including a cumulative dividends provision

Answer 1

First question:

The fourth option stating "By including a call provision" is correct

By including a call provision, the issuer can call the preferred stock as per the terms and conditions stated there, and thus the preferred stock will cease to exists. This is equivalent to saying the preferred stock has achieved its maturity.

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Second question:

P / E = 10

Hence, you are earning $ 1 for $ 10 invested today. Since all earnings are distributed as dividends, there will be no growth in the earnings. Hence, you are earning $ 1 every year for $ 10 invested today. Hence, it will take you 10/1 = 10 years to recover his / her initial investment.

Hence, the correct answer is the first option.