Question

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.

Answer 1

Preferred stock is sometimes treated like a debt security because preferred dividend payments are fixed in nature and preferred stock holders receive a residual value.

Step-by-step explanation:

Preferred stock is sometimes treated like a debt security because preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings (option B). Preferred stock holders receive a residual value and not a stated value, so they have a preference over common stockholders when it comes to receiving dividends (option D).