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To discuss: The statement of “it often said to combine the worst features of common stock and bonds “and the reason why
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Explanation of Solution
Numerous times preferred stock is mentioned to as a hybrid security because it has numerous features of both common stock and bonds. It has features of common stock: there is no static maturity date, the default of dividends does not force bankruptcy, and dividends are not deductible for the purpose of tax. But they are similar to bonds because the dividends are stable in amount as interest payments.
From the view point of the preferred stock shareholder, this is not the most pleasant mixture. On one hand, the dividends are inadequate as with bonds, but the security of involuntary payment by the threat of bankruptcy is not there. Therefore, from view point of the investor, the worst characteristics of common stock and bonds are joined.
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Chapter 8 Solutions
Foundations Of Finance
- Explain why preferred stock is considered to be a hybrid of equity and debt securities?arrow_forwardWhy do some financial analysts treat preferred stock as a special type of bond rather than as an equity security?arrow_forwardWhich of the following statements is false? The cost of debt securities is highest due to their relatively low risk The cost of common stock is highest due to its relatively high risk The cost of preferred stock falls somewhere between debt and common stock None of the abovearrow_forward
- why is money market necessary but not sufficient for the liquidity of securities on the stock marketarrow_forwardAccess the glossary (“Master Glossary”) to answer the following. a. What is a “convertible security”? b. What is a “stock dividend”? c. What is a “stock split”? d. What are “participation rights”?arrow_forwardBased on the Signaling Theory, issuance of common stock is a negative sign. Do you agree or disagree?arrow_forward
- 7. Which of the following is least likely to be a financial security? a. Bonds b. Preferred stocks c. Common stocks d. Currency e. Derivatives f. None of the abovearrow_forwardIs it safer to invest in stocks than bonds?why or why not?arrow_forwardWhich theory of the term structure proposes that bonds of different maturities are not substitutes for one another? a. Market segmentation theory b. Expectations theory c. Separable markets theory O d. Liquidity premium theoryarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTAuditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College Pub
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