Why Is the Cost of Debt Normally Lower Than the Cost

question 41

Multiple Choice

Why is the cost of debt normally lower than the cost of preferred stock?

• A) Preferred stock dividends are tax deductions.
• B) Interest on debt is tax deductible.
• C) Preferred stock dividends must be paid before common stock dividends.
• D) Common stock dividends are not tax-deductible.

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Definitions:

Price Rise

An increase in the cost of goods or services, often influenced by factors like supply and demand, inflation, or production costs.

Supply Elasticity

The degree to which the supply of a commodity reacts to shifts in its market price.

Adjustment Period

The time frame in which adjustments are made to adapt to new conditions, such as changes in interest rates for adjustable-rate mortgages or the transition period in economic policies.

Demand Increase

A situation where the quantity of a good or service that consumers are willing and able to purchase at a given price rises.