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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

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

Has a par, or face, value.

Failure to pay a preferred dividend does not send the firm into bankruptcy.

Consider the case of Ferro Enterprises:

At the present time, Ferro Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Ferro has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $10 per share. If the investors pay $110.22 per share for their investment, then Ferros cost of preferred stock (rounded to four decimal places) will be .

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