Series 79 practice questioneasyCapital Structure Analysis
Why is preferred stock usually viewed as sitting between debt and common equity in the capital structure?
- AIt has priority over common equity for dividends and liquidation proceeds but is junior to debt✓ Correct answer
- BIt always carries voting control over the board
- CIt is secured by specific collateral
- DIt eliminates the issuer’s tax expense
Explanation
Why A — It has priority over common equity for dividends and liquidation proceeds but is junior to debt
It has priority over common equity for dividends and liquidation proceeds but is junior to debt Preferred stock is senior to common stock economically but does not have the creditor protections of debt. That hybrid position explains why its return expectations and covenant packages usually fall between debt and common equity.
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