Question

Which of the following statement is most correct?

a) A big advantage of preferred stock is that preferred stock dividends are tax deductible for the issuing corporation

b) One of the advantages to the firm associated with financing using preferred stock rather than common stock is that control of the firm is not diluted.

c) Preferred stock typically pays a dividend amount that increases annually.

d) Preferred stockholders have the legal right to force the firm into bankruptcy, if the firm fails to pay dividends on preferred stocks.

Answer 1

given data,

PREFERENCE STOCK OR SHARES :-

preference shares are one of the types of shares issued by the companies, as name says the preference shares have certain preference in receiving the dividend after the debenture holders and before the ordinary share holders. these share holders does not have voting rights like ordinary share holders in the company. there are certain types of preference shares those are,

• cumulative preference shares and non-cumulative preference shares
• redeemable preference shares and non-redeemable preference shares
• convertible and non-convertible preference shares

a) A big advantage of preferred stock is that preferred stock dividends are tax deductible for the issuing corporation.

explanation

This statement is some what true but in real scenario of business the company does not show any interest in issuing these stocks because of higher cost of capital to the company. preference stock dividends are tax deductible only up to a limited value.

b) One of the advantages to the firm associated with financing using preferred stock rather than common stock is that control of the firm is not diluted

explanation

This statement is true ,because of companies want to issue preference stock for the purpose of financing. if the company issues the common stock then there is a chance for ownership dilution and chances of getting management out of control because of lack of share in the company of the board members so, it is not good for the company.

c) Preferred stock typically pays a dividend amount that increases annually.

explanation

This statement is some what true, because of most of the preference shares does not get the constant dividends(only cumulative) which does not increase the dividend amount annually.

d) Preferred stockholders have the legal right to force the firm into bankruptcy, if the firm fails to pay dividends on preferred stocks.

explanation,

This statement is hypothetical to determine whether it is true or not, because It still not happened in the real business scenario.

conclusion :- STATEMENT (B) IS MOST CORRECT.