The after-tax cost of debt is cheaper than preferred stock to the issuing corporation, all things being equal.

Question

Quizplus · Accepted Answer

The after-tax cost of debt is cheaper than preferred stock because the interest paid on debt is tax-deductible, reducing the effective cost of borrowing for the corporation. On the other hand, dividends paid on preferred stock are not tax-deductible, making the cost of capital higher for the corporation.

The After-Tax Cost of Debt Is Cheaper Than Preferred Stock