1. Which of the following statements is CORRECT?

In a bankruptcy, preferred shareholders come before bondholders.

Compared to common stocks, preferred stock is less risky to the holders of the security.

Corporations cannot buy the preferred stocks of other corporation.

Dividends on preferred stocks are tax deductible by the issuing firm.

A firm can stop paying dividends to preferred shareholders while it continues to pay dividends to common shareholders.

2. Acme Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -10% return. What is the firm's expected rate of return?

7.72%

8.12%

8.55%

9.00%

11.00%