Which one of the following is a true statement?
A) Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.
B) Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.
C) Preferred stockholders have voting power.
D) Investors can sue managers for nonpayment of preferred dividends.

Question

Quizplus · Accepted Answer

This is a true statement known as the "cumulative feature" of preferred stock. If a company fails to pay preferred dividends in any given year, it must make up those missed payments before paying dividends to common shareholders. This means that common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.

Option A is a false statement as dividends on preferred stocks are not tax-deductible for individual investors or corporate investors.

Option C is also false as preferred stockholders do not typically have voting power, unlike common stockholders.

Option D is partially true as investors may have the right to sue managers for nonpayment of preferred dividends if it is stated in the terms of the preferred stock, but this is not a universal right and may vary based on the conditions of the security.

Which One of the Following Is a True Statement