Due to its risk characteristics compared to the ordinary preferred stock, cumalitive preferred should present a ____ expected return.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Due to its risk characteristics compared to the ordinary preferred stock, cumalitive preferred should present a ____ expected return. 

- lower

- higher 

- same amount? 

Expert Solution
Step 1

Due to its risk characteristics compared to the ordinary preferred stock, cumulative preferred should present a lower expected return.

Reason

 As the cumulative feature of preferred stock reduces the dividend risk to investors, cumulative preferred stock can usually be offered with  a lower payment rate than required for a non cumulative preferred stock.  Due to this lower cost of capital, most companies preferred stock offerings are issued with cumulative feature.

 

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