5F.1
1. Why is the price for Microsoft Preferred
Stock less volatile than the price of Microsoft Common Stock? [5]
Preferred stock has a claim that is more senior than common stock (preferred stockholders stand in the money line in front of common stock holders). Since preferred stock holders are promised a fixed dividend every period, their claim is very similar to that of a bond. While any change in the future residual cash flows will change the value of the common stock, only changes severe enough to affect Microsoft's ability to pay its preferred dividend would affect the value of the preferred stock.