Dear Tutor,

Based what I learned, answer "e. It gives the owner priority if the firm files for bankruptcy" is correct. Can you please confirm.

Or is the correct answer d. ?

Which of the following items is a characteristic of preferred stock?

a. It represents ownership in the firm.

b. Preferred stock owners are taxed at a lower rate.

c. It can be used to purchase the firm's bonds.

d. It represents a claim against future common dividends.

e. It gives the owner priority if the firm files for bankruptcy.

FYI - based on the textbook by:

Irons, R. (2019). The fundamental principles of finance. Taylor & Francis Group.

Page 83 it states,

Preferred stock is more of a hybrid security, in that it has features similar to both common stock and bonds. For example, preferred stock pays a dividend, but it is a fixed dividend, whereas common dividends are expected to grow (more about that later). Since it is fixed, the preferred dividend is more like an interest payment. In the case of bankruptcy, preferred shareholders are higher on the list than the common shareholders. Also, if the firm suspends both preferred and common dividends for a period of time, before they can pay any new common dividends, they must pay all of the preferred dividends that went unpaid during the period of dividend suspension

Thanks in advance for your help.