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Explanation of preferred stocks

Assume that you have decided to invest a portion of your money in the stock market. You ask your broker to recommend a couple of preferred stocks for you to consider as an investment. Your broker recommends the following two companies. Both are start-up corporations, but you agree with your broker that both have excellent potential for the future.

Company A: Noncumulative, nonparticipating, preferred stock with a $4-per-year dividend rate. Each share of this stock will cost you $20.

Company B: Cumulative, nonparticipating, preferred stock with a $4-per-year dividend rate. Each share of this stock will cost you $25.

You have decided to invest in only one of the companies. State which company you would choose and why.

Solution Preview

I think I would invest in Company B. Although the share of the stock for Company B would cost more, the risk is less because it is a cumulative, preferred stock. With the cumulative preferred stock, if Company B does ...

Solution Summary

This solution provides and explanation between Company A: Noncumulative, nonparticipating, preferred stock with a $4-per-year dividend rate. Each share of this stock will cost you $20 and Company B:Cumulative, nonparticipating, preferred stock with a $4-per-year dividend rate. Each share of this stock will cost you $25 and discusses the better choice between the two companies.
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$2.19