What Is an Advantage to a Business When Financing Through

question 35

Multiple Choice

What is an advantage to a business when financing through an issue of preferred shares rather than bonds?

• A) Preferred shares trade on stock exchanges as well as OTC (over the counter) making preferred share issues always easier to place.
• B) A company is legally obligated to pay interest to its bondholders. Dividends to preferred shareholders can be deferred indefinitely.
• C) Preferred shareholders demand a lower rate of return than bondholders.
• D) Dividends paid to preferred shareholders can be written off against taxes at a higher rate than interest payments to bond holders.
• E) Preferred shareholders demand a lower value of assets to be pledged against the capital they provide to the business than bondholders do.

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Definitions:

Inelastic

A characteristic of demand when consumers' purchase quantities are not significantly affected by changes in the price of a good or service.

Good Substitutes

Products or services that can be used in place of one another, satisfying the same needs or wants of the consumer.

Elastic

Describes demand or supply that is highly sensitive to changes in price; a small change in price leads to a large change in the quantity demanded or supplied.

Perfectly Inelastic

Describing a situation where demand or supply does not change in response to changes in price.