FIN621 GDB

FIN621 3rd GDB
Explain why preferred stock is considered as debt.
ANS:
Preferred stock is hybrid instrument which contains both characteristics of (equity and debt).But some time companies show it in balance sheet as a debt.First of all we will see what is debt?debt is something that must be repaid, is not an ownership or interest in the firm, creditors do not have voting power, interest paid on debt is fully tax deductible, dividends are paid after taxes, and are considered a return on shareholders contributed capital, unpaid debt is a liability, dividends are not a liability.Now see what similiarities a preferred stock have .Preferred stock is considered a debt because it has no ownership or interest in the firm, share holders of preffered stock do not have voting power, dividen paid on debt is 70% tax deductible, dividends are paid after taxes, and are considered a return on shareholders contributed capital, unpaid debt is a liability, dividends are not a liability .Preffered stock is considered as debt due to its resemblance with bonds which are debt instruments.In addition, preferred stock may have the following features: adjustable rate,cumulative, convertible, callable,participating, and prior preferred.