corporations prefer bonds to preferred stock for financing their operations because?
A. prefered stocks require a dividend
B. bond interest rates change with the economy while stock dividends remain constant
C. the after-tax cost of debt is less than the cost of preferred stock
D. none of the above
preferred stock don't require a dividend, I don't know if stock dividends remain constant, after-tax cost of debit is cheeper than the cost of preferred stock.
I like C as my FINAL ANSWER, but I am not certain
Is this correct?
The answer is C because the bond interest payments can be considered a business expense, leaving more after tax income for stockholders and retained earnings.
Yes, you are correct. Corporations prefer bonds to preferred stock for financing their operations because the after-tax cost of debt (bonds) is generally lower than the cost of preferred stock. So option C is the most accurate answer.
To determine the correct answer, let's analyze each option:
A. Preferred stocks require a dividend: This statement is incorrect. Preferred stocks do not necessarily require a dividend. Companies have the discretion to pay or skip dividends on their preferred stocks.
B. Bond interest rates change with the economy while stock dividends remain constant: This statement is partially correct. Bond interest rates are fixed when the bonds are issued, while stock dividends can vary depending on the company's performance and decision to distribute dividends.
C. The after-tax cost of debt is less than the cost of preferred stock: This statement is generally true. Corporations can typically benefit from tax advantages when using debt financing (bonds) due to the deductibility of interest expense, making the after-tax cost of debt lower compared to the cost of preferred stock.
Based on this analysis, option C appears to be the most accurate answer choice. However, it's essential to note that every corporation's decision on financing methods can be different and may vary based on their individual circumstances and preferences.