Multiple Choice
Preferred stock is least likely to have which of the following characteristics?
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12. Stockholders' Equity
Preferred Stock
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Preferred stock carries priority over common stock:
A
only in voting rights at shareholder meetings
B
in the issuance of new shares to the public
C
in the ability to convert shares into bonds
D
in the payment of dividends and distribution of assets upon liquidation
Verified step by step guidance1
Understand the concept of preferred stock: Preferred stock is a type of equity security that has priority over common stock in certain aspects, such as dividend payments and asset distribution during liquidation.
Clarify the priority in dividend payments: Preferred stockholders are entitled to receive dividends before common stockholders. This means that if a company declares dividends, preferred stockholders are paid first.
Explain the priority in asset distribution upon liquidation: In the event of a company's liquidation, preferred stockholders have a higher claim on the company's assets compared to common stockholders. This ensures they are compensated before common stockholders if assets are available.
Differentiate voting rights: Preferred stock typically does not carry voting rights at shareholder meetings, unlike common stock, which often includes voting privileges.
Summarize the correct answer: The priority of preferred stock is specifically in the payment of dividends and the distribution of assets upon liquidation, not in voting rights, issuance of new shares, or conversion into bonds.
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