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7. Preferred stock Preferred stock is often called a hybrid security because it has some characteristics that are typical of debt and others that are

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7. Preferred stock Preferred stock is often called a hybrid security because it has some characteristics that are typical of debt and others that are typical of common equity. The following table lists several characteristics of preferred stock. Determine which of these characteristics are consistent with debt securities and which are consistent with common stock. Characteristic Debt Common stock May have a sinking fund provision Usually has no specified maturity date Usually has no voting rights Green Caterpillar Garden Supplies Inc. has the right to buy back its preferred stock from its preferred stockholders; however, the company will have to pay the preferred stockholders an amount greater than the par value of the preferred stock. Which type of provision does Green Caterpillar have in its preferred stock agreement? O A call provision O A participating provision O A sinking fund provision For the same issuing firm and on the same day of issuance, which security tends to have a lower after-tax cost to the issuer, debt or preferred stock? Why is this the case? O Preferred stock, because its has priority over debt in the payment of dividends and the distribution of liquidated assets O Debt, because its interest payments are not tax deductible O Debt, because its interest payments are tax deductible O Preferred stock, because preferred stock issues are not allowed to have sinking fund provisions

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