Profitable companies often prefer to issue debt rather than preferred stock because
A) debt creates less risk for the company.
B) interest payments are fixed but preferred shareholders expect dividends to grow.
C) preferred shares dilute the voting rights of common shareholders but bonds do not.
D) interest on debt is deductible for tax purposes, but preferred dividends are not.

Question

Quizplus · Accepted Answer

The interest on debt is deductible for tax purposes, but preferred dividends are not. This makes issuing debt more attractive for profitable companies as it can reduce their tax burden. Additionally, preferred shareholders expect dividends to grow, which can lead to more financial pressure on the company.

Profitable Companies Often Prefer to Issue Debt Rather Than Preferred