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Homework answers / question archive / Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity
Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity. Characteristics Debt Equity Usually has no voting rights. Failure to pay a preferred dividend does not send the firm into bankruptcy. Consider the case of Galbraith Enterprises: At the present time, Galbraith Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Galbraith has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $13 per share. If the investors pay $100.15 per share for their investment, then Galbraith's cost of preferred stock (rounded to four decimal places) will be
Solution
Question 1:
Debt - Usually has no voting right
Equity - Failure to pay a preferred dividend does not send the firm into bankruptcy
Question 2:
Cost of preferred stock = Annual dividend/Current Price
Cost of preferred stock = $13/$100.15 = 12.9805%