topic preferred stock Ch 06: Assignment Fixed-Income Securities: Characteristics
ID: 2819650 • Letter: T
Question
topic preferred stock
Ch 06: Assignment Fixed-Income Securities: Characteristics and Valuatiorn Preferred stock is often called a hybrid security because it has some characteristics that are typical of debt and others that are typical of common equity. The following table lists several characteristics of preferred stock. Determine which of these characteristics are consistent with debt securities and which are consistent with common stock. Characteristic Its dividends are fixed in amount. It has a par, or face, value. Failure to pay its dividend does not send lade firm into bankruptcy Debt Common stock Blue Hamster Manufacturing Inc. has the right to buy back its preferred stock from its preferred stockholders; however, the company will have to pay the preferred stockholders an amount greater than the par value of the preferred stock. Which type of provision does Blue Hamster have in its preferred stock agreement? A sinking fund provision A participating provision O A call provision For the same issuing firm and on the same day of issuance, which security tends to have a greater after-tax cost to the issuer, debt or preferred stock? Why is this the case? O Preferred stock, because its dividend payments are not tax deductible Debt, because its interest payments are not tax deductible O Preferred stock, because its dividend payments are tax deductible Debt, because its interest payments are tax deductibleExplanation / Answer
Its dividends are in fixed amount - DEBT
It has par or face value - DEBT
Failure to pay dividend does not send the firm into bankruptcy - EQUITY
Which type of provision does blue Hamseter have in preferred stock agreement? A CALL PROVISION
Statement: PREFERRED STOCK, BECAUSE ITS DIVIDEND PAYMENTS ARE NOT TAX DEDUCTIBLE
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