Which statement about preferred stock is true?

Which statement about preferred stock is true?

• A. Holders have voting rights equal to common stock
• B. Holders have a claim on assets up to a stated par value
• C. They are guaranteed dividends by the state
• D. They are senior to bonds in bankruptcy

Answer: (B)

The main idea is that preferred stock sits between bonds and common stock in a company’s capital structure, with a focus on liquidation priority. Preferred stock typically has fixed dividends and may lack voting rights, but its standout feature for this question is its claim in a liquidation scenario. In bankruptcy, claims are paid in order of priority: creditors and bondholders are paid first, then preferred stockholders up to the par value of their shares, and only after that would anything be left for common stockholders. The stated par value represents the maximum amount preferred holders are entitled to receive from the company’s remaining assets, per share. Dividends are not guaranteed by the state, and preferred stock is not senior to bonds, so those statements are not true.

The main idea is that preferred stock sits between bonds and common stock in a company’s capital structure, with a focus on liquidation priority. Preferred stock typically has fixed dividends and may lack voting rights, but its standout feature for this question is its claim in a liquidation scenario. In bankruptcy, claims are paid in order of priority: creditors and bondholders are paid first, then preferred stockholders up to the par value of their shares, and only after that would anything be left for common stockholders. The stated par value represents the maximum amount preferred holders are entitled to receive from the company’s remaining assets, per share. Dividends are not guaranteed by the state, and preferred stock is not senior to bonds, so those statements are not true.