How does a corporation's fixed dividend obligation affect shareholders?

How does a corporation's fixed dividend obligation affect shareholders?

• A. It guarantees profit for common shareholders
• B. It ensures that preferred shareholders receive consistent payments
• C. It prevents the issuance of new common shares
• D. It dictates the price of common shares in the market

Answer: (B)

A corporation's fixed dividend obligation specifically relates to preferred shareholders, as these investors are entitled to receive a predetermined fixed dividend before any dividends can be paid to common shareholders. This arrangement provides a level of financial predictability and security for preferred shareholders, as they are assured of receiving these payments regardless of the corporation's profit levels, provided that the corporation is in a position to make such payments. In contrast, common shareholders do not have a guaranteed dividend and their returns can be more volatile, depending on the company's performance and the board of directors' decisions regarding profit distribution. Therefore, while common shareholders benefit from potential highs in profit and capital appreciation, their dividends are not fixed or guaranteed in the same manner as those of preferred shareholders. When a corporation has a fixed obligation to pay dividends to preferred shareholders, it can impact the cash flow available to the common shareholders and influence the attractiveness of the company's stock.

A corporation's fixed dividend obligation specifically relates to preferred shareholders, as these investors are entitled to receive a predetermined fixed dividend before any dividends can be paid to common shareholders. This arrangement provides a level of financial predictability and security for preferred shareholders, as they are assured of receiving these payments regardless of the corporation's profit levels, provided that the corporation is in a position to make such payments.

In contrast, common shareholders do not have a guaranteed dividend and their returns can be more volatile, depending on the company's performance and the board of directors' decisions regarding profit distribution. Therefore, while common shareholders benefit from potential highs in profit and capital appreciation, their dividends are not fixed or guaranteed in the same manner as those of preferred shareholders.

When a corporation has a fixed obligation to pay dividends to preferred shareholders, it can impact the cash flow available to the common shareholders and influence the attractiveness of the company's stock.