Question

In what ways is preferred stock like long-term debt? In what ways is it like equity? Explain why companies may prefer to issue preferred rather than common stock. Support your answers with some examples.

Answer 1

Solution:-

Preferred stock are similar to long-term debt that dividends on preferred stock, interest on debt, are remain constant over time. Both securities have a fixed claim on the assets in the event of bankruptcy of the firm. Thus, preferred stock and long-term debt are both considered as fixed income securities.

Preferred stock is similar to common stock in that it is part of Equity. Also, holders of preferred stock and common stock both are receive returns in the form of dividends rather than interest. Preferred stock gets dividend and commom equity gets dividend and return of the company.

There are several ways in which companies can raise funds, including stocks and bonds. Companies get more more funding then Common stocks and bonds because Investors wants more consistent dividend and bankruptcy protections than others.

Most of the companies issues Preferred stock because Companies wants to lower its debt equity rato and gives less controls in the hands of outsiders than common stock.

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