Preferred stock is a hybrid security because it shares characteristics of both debt and equity securities. However, it is often hard to know how to classify preferred stock when talking about a firms leverage.

Read the following statement about a characteristic of preferred stocks and answer the corresponding question.

Firms that invest in companies preferred stock may exclude 50% of their preferred dividend income from taxes.

True or False: The preceding statement accurately describes a characteristic of preferred stocks.

True

False

Preferred stock offers the issuing corporation and investors advantages and disadvantages. Which of the following statements describes an advantage for the issuer of preferred stock?

-Choosing to not pay a preferred dividend payment will not lead the firm to bankruptcy.

-The after-tax cost of preferred stock is higher than the after-tax cost of debt.