Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Preferred Stock

Financial Accounting

12. Stockholders' Equity

Preferred Stock

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Multiple Choice

Which of the following is a primary reason a corporation might choose to issue preferred stock?

To guarantee tax-free dividends to shareholders

To raise capital without diluting voting control of existing shareholders

To avoid paying any dividends to investors

To increase the number of votes per share for new investors

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Verified step by step guidance

Understand the nature of preferred stock: Preferred stock is a type of equity that typically provides shareholders with fixed dividends and priority over common stockholders in the event of liquidation. However, it usually does not carry voting rights, unlike common stock.

Analyze the options provided: The question asks for the primary reason a corporation might issue preferred stock. Carefully evaluate each option to determine its validity based on the characteristics of preferred stock.

Eliminate incorrect options: For example, 'To guarantee tax-free dividends to shareholders' is incorrect because dividends from preferred stock are generally taxable. Similarly, 'To avoid paying any dividends to investors' is incorrect because preferred stock often comes with an obligation to pay fixed dividends.

Focus on the correct reasoning: Preferred stock allows a corporation to raise capital without diluting the voting control of existing shareholders. Since preferred stockholders typically do not have voting rights, issuing preferred stock does not impact the voting power of common shareholders.

Conclude the reasoning: The correct answer is 'To raise capital without diluting voting control of existing shareholders,' as this aligns with the primary advantage of issuing preferred stock.