In "GM May Have Landed a Dandy Daewoo Deal," in the October 8, 2001, BusinessWeek issue, Moon Ihlwan and David Welch explained details of the purchase agreement between General Motors Corp. and Korea's Daewoo Motor Co. GM and its partners were to put \(\$ 400\) million into a joint venture that took control of the Daewoo assets. Daewoo's creditors were to receive \(\$ 1.2\) billion in preferred stock, paying 3.5 percent, in the new company. Reports by those familiar with the deal say that GM had the option of buying back those preferred shares sometime after 2001. In addition, the agreement called for assuming just \(\$ 830\) million of Daewoo's \(\$ 17\) billion debt.

Instructions

a. Define a preferred stock and identify the typical characteristics of preferred stock.

b. What are the advantages to General Motors Corporation of using preferred stock (rather than cash) in its acquisition of Daewoo? Why would the creditors of Daewoo desire preferred stock rather than common stock?