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.

Question

Quizplus · Accepted Answer

Preferred dividend payments are usually fixed and paid out before common dividends, similar to the fixed nature of bond-interest payments. This makes preferred stock similar to a debt security in terms of cash flows. However, legally preferred stock is not considered a debt security, and preferred dividends are not deductible from taxable income like bond interest payments. The statement about receiving residual value instead of a stated value is not accurate for preferred stock, as preferred stockholders are typically paid a predetermined fixed dividend.

Preferred Stock Is Sometimes Treated Like a Debt Security Because