For purposes of measuring a firm’s leverage, should preferred stock be classified as debt orequity? Does it matter whether the classification is being made (a) by the firm’s management,(b) by creditors, or (c) by equity investors?

For purposes of measuring a firm’s leverage, should preferred stock be classified as debt orequity? Does it matter whether the classification is being made (a) by the firm’s management,(b) by creditors, or (c) by equity investors?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter5: Evaluating Operating And Financial Performance

Section: Chapter Questions

Problem 8DQ

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Question

For purposes of measuring a firm’s leverage, should preferred stock be classified as debt or
equity? Does it matter whether the classification is being made (a) by the firm’s management,
(b) by creditors, or (c) by equity investors?

Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.

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