Which of the Following Statements Pertaining to Preferred Shares Is

question 20

Multiple Choice

Which of the following statements pertaining to preferred shares is correct?

• A) If the preferred shares are non-cumulative, the current year's net income would be allocated to the preferred shares whether or not preferred dividends are declared.
• B) If the preferred shares are non-cumulative, only the current year's net income would be allocated to preferred shares if preferred dividends are declared, since dividends are never in arrears with non-cumulative preferred shares.
• C) If the preferred shares are cumulative, the current year's net income would be allocated to the shares, only if dividends are declared in the year.
• D) There can never be any dividends in arrears when preferred shares are cumulative.

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Definitions:

Efficient Market Theory

A hypothesis stating that financial markets fully incorporate all available information into asset prices at all times.

Interest Rate

The annual percentage rate applied to the outstanding amount of a loan, representing the charge borrowers pay for interest.

Fundamental Value

The intrinsic worth of an asset, determined by its cash flows, dividends, and growth prospects, rather than current market conditions.

Adverse Selection

A term describing a situation where due to asymmetric information between buyers and sellers, the party with more information (often the seller) takes advantage of the other, leading to a market with higher risks and lower quality products.