In liquidation, do owners of preferred stocks have priority to receive their investment before common stockholders?

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Multiple Choice

In liquidation, do owners of preferred stocks have priority to receive their investment before common stockholders?

In liquidation, preferred stockholders have a higher claim on the company’s assets than common stockholders. This is the essence of a liquidation preference: after creditors are paid, the next in line are the holders of preferred stock, up to their fixed investment (often the par value), and, if the preferred is cumulative, any accrued dividends. Only after satisfying that priority do remaining assets go to common stockholders. The priority exists regardless of whether dividends are in arrears, so the correct takeaway is that preferred stockholders receive their investment before common stockholders in a liquidation scenario.

In liquidation, preferred stockholders have a higher claim on the company’s assets than common stockholders. This is the essence of a liquidation preference: after creditors are paid, the next in line are the holders of preferred stock, up to their fixed investment (often the par value), and, if the preferred is cumulative, any accrued dividends. Only after satisfying that priority do remaining assets go to common stockholders. The priority exists regardless of whether dividends are in arrears, so the correct takeaway is that preferred stockholders receive their investment before common stockholders in a liquidation scenario.

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