Which type of preferred stock permits the owner to exchange it for common stock?

The correct response is convertible preferred stock. This type of preferred stock allows the shareholder to exchange their preferred shares for a specified number of common shares, typically at a predetermined price. This characteristic gives the investor the potential to benefit from the appreciation in the common stock’s value while retaining the priority income stream generally associated with preferred shares.

Convertible preferred stock is appealing to investors who believe in the potential growth of the company and want to participate in the appreciation of common shares while still enjoying some of the benefits of preferred stock, such as fixed dividends and priority claim over common shareholders in the event of liquidation. The ability to convert to common stock provides flexibility and can lead to enhanced returns, especially if the company performs well.

In contrast, callable preferred stock allows the issuer to repurchase the shares at a specified price after a certain date, but it does not provide the exchange feature. Cumulative preferred stock ensures that any missed dividend payments are accrued and paid to preferred shareholders before any dividends can be paid to common stockholders, but it lacks the conversion feature. Protected preferred stock generally refers to shares that have specific rights or protections against dilution or changes in corporate structure but does not imply that they can be exchanged for common stock.