Question

A corporation originally was formed with only common stock outstanding. If a company suffers financial distress or goes bankrupt, preferred stockholders receive full repayment of their investments before any amounts are paid to common stockholders.

Would it be ethical for this corporation to issue preferred stock?

Answer 1

Yes.

Explanation :- It is true that Preferred stockholders receive full repayment of their investments before any amounts are paid to common stockholders. However, it is also true that they are cheap as compared to the common stocks due to less risk associated with them. Thus, they provide cheap finance. Other things being favorable, cheap finance results in increase in earnings available for stockholders.

Thus, issuing preferred stock may result in increase in earnings of common stockholders. Therefore, it will be ethical for this corporation to issue Preferred stock.