One advantage of preferred stock is its ability to increase leverage, which in turn will magnify the effects of increased earnings on common stockholders' returns.

Question

Quizplus · Accepted Answer

Preferred stock typically has a fixed dividend rate, which means that as earnings increase, the return to preferred stockholders remains the same. This allows the company to use leverage (borrowing money) to invest in projects that can potentially increase earnings, without diluting the returns to common stockholders. This can lead to an overall increase in returns to common stockholders due to the magnification effect of leverage.

One Advantage of Preferred Stock Is Its Ability to Increase