CFI Financial Modeling And Valuation Analyst (FMVA) Practice Exam

Which statement best describes preferred shares?

Debenture issued by the company. Shares that entitle owner to a fixed dividend amount and have priority in dividends and assets before common stock owners, usually without voting rights. Shares that must be voted on by all shareholders every year. A type of tax payable.

Correct Answer:

Shares that entitle owner to a fixed dividend amount and have priority in dividends and assets before common stock owners, usually without voting rights.

Explanation:

Preferred shares are a class of equity that sits between common stock and debt. They typically offer a fixed dividend, providing a predictable income stream, and they have priority over common shares for both dividend payments and the distribution of assets in liquidation. At the same time, they usually don’t carry voting rights, so holders don’t participate in corporate governance like common shareholders do. This combination—fixed dividend, priority in dividends and assets, and often no voting rights—best describes preferred shares. A debenture is a debt instrument, not equity; requiring all shareholders to vote annually is not a defining feature of preferred stock; and a tax is not a type of share.

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