Table 17-4 Features of alternative security issues Common Stock Preferred Stock Bonds 1.Ownership and control of the firm Belongs to common stockholders through voting rights and residual claim to income Limited rights when dividends are missed Limited rights under default in interest payment 2.Obligations to provide return None Must receive payment before common stock Contractual obligation 3.Claim to assets in bankruptcy Lowest claim of any security holder Bondholders and creditors must be satisfied first Highest claim 4.Cost of distribution Highest Moderate Lowest 5.Risk-return trade-off Highest risk, highest return (at least in theory) Moderate risk, moiler-ate return Lowest risk, moderate return 6.Tax status of payment by corporation Not deductible Not deductible Tax-deductible Cost = Interest pay-ment x (1 — Tax rate) 7.Tax status of payment to recipient 70 percent of dividend to another corporation is tax-exempt Same as common stock Municipal bond interest is tax-exempt