Preferred and Common Stock: Understanding the Key Differences

Preferred and Common Stock Differences

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Question

Preferred and common stock differ in that

Answers

A. failure to pay dividends on common stock will not force the firm into bankruptcy, while failure to pay dividends on preferred stock will force the firm into bankruptcy.

B. common stock dividends are a fixed amount, while preferred stock dividends are not.

C. preferred stock dividends are deductible as an expense for tax purposes, while common stock dividends are not.

D. preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy.

E. none of these answers.

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Explanations

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A. B. C. D. E.

In the event of bankruptcy, the claims of preferred shareholders must be satisfied before common shareholders receive anything. The interests of common shareholders are secondary to those of other claimants.

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