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Chapter 5: Q9DQ. (page 565)

What is the most likely explanation for the use of preferred stock from a corporate viewpoint?

Short Answer

Expert verified

The preference shares are issued as they help in raising capital without diluting ownership shares and also do not result in debt obligations.

Step by step solution

01

Meaning of preference shares

The preference shares are the shares issued by the company that provides dividends to the shareholders. These shares can be categorized as cumulative, non-cumulative, participating, and convertible shares.

02

The reason for utilizing preferred stock

The preferred stock is used by the company to ensure a balance in the company’s capital structure. The preferred stock helps the company in raising the capital without diluting its ownership stake or incurring additional debt obligations.

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