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
Section: Chapter Questions
Problem 1PS
Related questions
Question
Due to its risk characteristics compared to the ordinary
- 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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