Preferred stock valuation uses a constant dividend while common stock can receive dividends based on fixed growth or dividends based on earnings. Why is this statement true?
A) Preferred stock receives just as much dividends as common stock.
B) Since not many companies use preferred stock, they just made the calculations easier.
C) Preferred stock receives dividends based on a set amount where common stock can receive dividends either equal to preferred stock or based on earnings.
D) Common stock dividends usually grow faster than preferred stock dividends.

Question

Quizplus · Accepted Answer

Preferred stock receives a fixed dividend amount, while common stock can receive varying dividends based on fixed growth or earnings. Therefore, preferred stock valuation requires the use of a constant dividend.

Preferred Stock Valuation Uses a Constant Dividend While Common Stock