Short answer questions

1 Trust preferred stock has 1) A fixed dividend payment, specified at the time of the issue 2) That is tax deductible 3) And failing to make the payment can give these shareholders voting rights. Assuming that trust preferred stock gets treated as equity by ratings agencies, which of the following firms is the most appropriate firm to be issuing it? And why?

A firm that is under levered, but has a rating constraint that would be violated if it moved to its optimal

A firm that is over levered that is unable to issue debt because of the rating agency concerns.

2. Dividend changes can operate as signals to the market. Is an increase in dividends always a positive signal? Explain why.