Which of the following is a characteristic of the price of preferred stock?

• A. It fluctuates widely with changes in company profits.
• B. It is determined solely by the company's dividend policy.
• C. It tends to remain relatively stable compared to common stock prices.
• D. It is always higher than the price of common stock.

Answer: (C)

Verified step by step guidance

1. Understand the nature of preferred stock: Preferred stock typically pays fixed dividends and has priority over common stock in dividend payments and during liquidation.
2. Recognize that because preferred stock dividends are usually fixed, the price of preferred stock tends to be less sensitive to changes in company profits compared to common stock, whose dividends and prices fluctuate more with company performance.
3. Note that the price of preferred stock is influenced by factors such as interest rates and the fixed dividend amount, rather than solely by the company's dividend policy or profits.
4. Compare preferred stock price behavior to common stock price behavior: common stock prices tend to fluctuate widely due to changes in company profits and investor expectations, while preferred stock prices are more stable.
5. Conclude that the characteristic 'It tends to remain relatively stable compared to common stock prices' correctly describes the price behavior of preferred stock.