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If preferred shares must be redeemed by a certain date, they should be classified as

a. equity.
b. debt.

User Raja Fawad
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1 Answer

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Final answer:

Preferred shares with mandatory redemption by a specific date should be classified as debt because they require the company to repay shareholders, much like a bond repayment.

Step-by-step explanation:

Preferred shares that must be redeemed by a certain date have a mandatory redemption feature that makes them function similarly to a bond. They offer a dividend that acts like a coupon rate for a bond, suggesting they possess characteristics of debt rather than equity. By definition, equity represents ownership with no maturity or redemption obligation, while debt includes a repayment of principal at some point.

Since the mandatory redemption of preferred shares requires the company to pay back the amount to preferred shareholders at a specified date, these shares resemble a debt obligation. This redemption obligation resembles a debt repayment, and therefore, the preferred shares should be classified as debt.

User Xjedam
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