Question

Which of the following statements concerning preferred stocks is true? The par value of a stock is always the same as the initial selling price. Preferred stock dividends per share are normally increased as the earnings of the firm increase. Preferred stockholders have a prior claim on the income and assets of the firm as compared to the claims of lenders. Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems.

Answer 1

1. The par value of a preferred stock is always same as the initial selling price this is true, as pref stock is not traded on the exchange.

2. Preferred stock dividends per share are normally increased as the earnings of the firm increase. This is false, as they remains constant.

3. Preferred stockholders have a prior claim on the income and assets of the firm as compared to the claims of lenders. This is false, as lenders/debt holders have a first claim on the earnings of the company.

4. Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems, This is true, as they carry less risk than normal equity shares and a little more risk than the debt holders of the company. If the company is in serious financial trouble, it may not pay to its preferred share holders.