A dividend preference for preferred stock means that:

• A. preferred shareholders are guaranteed a fixed dividend regardless of company profits
• B. preferred shareholders must receive dividends before any dividends are paid to common shareholders
• C. preferred shareholders receive higher dividends than common shareholders every year
• D. preferred shareholders can vote on dividend amounts

Answer: (B)

Verified step by step guidance

1. Understand the concept of preferred stock: Preferred stock is a type of equity that typically provides shareholders with priority over common shareholders in receiving dividends and assets during liquidation.
2. Clarify the term 'dividend preference': Dividend preference means that preferred shareholders are entitled to receive dividends before any dividends are distributed to common shareholders.
3. Analyze the options provided: Evaluate each statement to determine which aligns with the definition of dividend preference. For example, preferred shareholders are not guaranteed a fixed dividend regardless of company profits unless specified in the stock terms.
4. Focus on the correct interpretation: Preferred shareholders must receive dividends before common shareholders, which is the essence of dividend preference. This does not imply higher dividends or voting rights on dividend amounts.
5. Conclude the reasoning: Based on the analysis, the correct answer is the statement that preferred shareholders must receive dividends before any dividends are paid to common shareholders, as this reflects the priority given to preferred stockholders.