The price of preferred stock may react strongly to a change in K_p (required rate of return) because A) preferred stock may be cumulative. B) preferred stock dividends have to be paid before common stock dividends. C) there is no maturity date. D) corporate recipients of preferred stock dividends may receive a partial tax exemption.

Question

Quizplus · Accepted Answer

Preferred stock prices are sensitive to changes in the required rate of return primarily because they have no maturity date, meaning investors cannot expect a return of principal at a fixed time, making the stock's value more dependent on the discount rate applied to its dividend payments.

The Price of Preferred Stock May React Strongly to a Change