Canadian Securities Course (CSC) Level 1 Practice Exam

What are the advantages and disadvantages of preferred shares?

1. Low cost of dividends, restricted voting rights

2. No dividend obligations, high cost of dividends

3. No equity dilution, long-term repayments

4. Flexible dividends, payment triggers default

The correct answer is: No dividend obligations, high cost of dividends

Preferred shares have the advantage of not having a dividend obligation, meaning that the company can choose whether or not to pay dividends to preferred shareholders. This flexibility allows companies to manage their cash flow better. On the other hand, preferred shares typically have a higher cost of dividends compared to common shares, which is a disadvantage as it can be a financial burden for the company.