Question

e. One of the legal rights that often goes with common stock is the preemptive right. This is the right of present stockholders to purchase their "proportional share" of all new securities that might be issued by the firm, including common and preferred stock, and all types of debt. 10. Which of the following statements is correct? a. A floating rate bond has an advantage over a fixed rate bond because its price is more stable and this makes a floating rate preferred bond more suitable as a liquid asset. b. Convertible preferred stock would likely appeal more to income-oriented investors because they can convert their capital gains into bond income simply by converting their preferred stock into bonds. c. One advantage of preferred stock from an issuer's perspective is that it has a lower after-tax cost than that of debt. d. One principal advantage of preferred stock is that preferred stockholders have a legal enforceable right to their stock dividend, thus, preferred stock is generally less risky than unsecured debt. e. Because of the 70% dividend exclusion rule for preferred stock dividends, the higher a company's tax bracket, the more likely it is to issue preferred stock.

Answer 1

10) E) Because of the 70% dividend exclusion rule for preferred stock dividends,the higher a company's tax bracket, the more likely is to issue preferred stock.

Explanation : 70% dividend exclusion rule allows a proportion of dividends received to be excluded from calculation of income taxes. So, when tax bracket is high then issuance of preferred stock increases. It reduces triple layer taxation.

Other alternatives :

Price of floating bonds are not stable .

convertible preferred stock never converted in to bond.

Preferred stock does not have any after tax advantage

Preferred stocks are more risky than unsecured debts.

So, first four alternative statements are not correct.