Why is preferred stock used less than long-term debt financing?
Preferred stock is used much less than long-term debt in the capital structure of most industrial and merchandising companies principally because:
the preferred stock dividend requirement is a fixed claim against income, but interest on long-term debt is not a fixed amount.
preferred stock has a fixed liquidation or redemption value, but long-term debt does not have a fixed maturity value.
preferred stock may be convertible to common stock, but long-term debt cannot be convertible.
for income tax purposes, dividends paid on preferred stock are not deductible, but interest on long-term debt is deductible.
The solution briefly explains why preferred stock is used much less than debt.
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