BUS 315 Chapter 2: chap2 questions-answer key.pdf
4 Dec 2013
School
Department
Course
Professor
Document Summary
Bodie, kane, marcus, perrakis and ryan, chapter 2. Since interest payments to bond- holders have to be paid and dividends don"t, preferred stocks cannot have a better rating than bonds: owners of preferred stocks have a prior claim on the rm"s earnings. The statement refers to common stocks, not bonds: owners of preferred stocks have a prior claim on a rm"s assets in the event of liquidation. Bondholders get paid before pre- ferred stock holders in the event of liquidation: corporations owning stocks may exclude from income taxes most of the div- idend income they receive. Tax rates on dividends are less than tax rates on interest income for anybody, not only corporations. However corporation ben- e ts from huge tax credit on dividend payments, which can go up to 100% if. This makes preferred stocks very attractive for corporations, and this explains why they can be sold with a much lower yield than comparable bonds.
