Debt financing
1) increases stockholders' return more than an equal dollar amount of preferred stock
2) increases stockholders' return less than an equal dollar amount of preferred stock
3) is less risky to the investor than preferred stock
4) is more risky to the investor than preferred stock
A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question

Debt financing​
1) increases stockholders' return more than an equal dollar amount of preferred stock
2) increases stockholders' return less than an equal dollar amount of preferred stock
3) is less risky to the investor than preferred stock
4) is more risky to the investor than preferred stock
A)​1 and 3
B)1 and 4​
C)2 and 3​
D)2 and 4​

Quizplus · Accepted Answer

Debt financing increases stockholders' return more than an equal dollar amount of preferred stock because interest payments on debt are tax-deductible, while dividends on preferred stock are not. Debt financing is also less risky to the investor than preferred stock because debt holders have a higher priority claim on the company's assets in the event of bankruptcy.

Debt Financing​ 1) Increases Stockholders' Return More Than an Equal Dollar Amount

Debt Financing 1) Increases Stockholders' Return More Than an Equal Dollar Amount