Preferred Stock Is Sometimes Treated Like a Debt Security Because

question 71

Multiple Choice

Preferred stock is sometimes treated like a debt security because:

• A) legally preferred stock is a debt security.
• B) preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.
• C) preferred dividends are deductible from taxable income just like interest payments on bonds.
• D) preferred stock holders receive a residual value and not a stated value.

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Definitions:

Corporation

A legal entity that is separate from its owners, providing them with limited liability, and has the ability to own assets, incur liabilities, and sell shares.

Interest Rate

The percentage charged by a lender to a borrower for the use of assets, typically expressed as an annual percentage of the principal.

Normal Return

The minimum profit necessary to keep a company in business, regarded as the cost of capital in the long run.

Investment

The allocation of resources, usually money, in order to earn a future return or profit.