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For purposes of measuring a firm’s leverage, should preferred stock be classified as debt or equity?...

For purposes of measuring a firm’s leverage, should preferred stock be classified as debt or equity? What are the differences if the classification is being made (a) by the firm’s management, (b) by creditors, and (c) by equity investors?

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Answer #1

The main reason to treat preferred stock as debt rather than equity is that it acts more like a bond than a stock, and investors buy it for current income, not capital appreciation. Like common stock, preferred stock represents an equity stake in a company, but its many features make it more like a debt security.

(a)Preferred stock is classified as part of capital stock in the stockholders’ equity section

So firms management treat preffered stock as a EQUITY

(b)Creditor consider preffered stock as a DEBT

(c) EQUITY INVESTOR consider preffered stock a s EQUITY as prefferd stock investor does not have voting rights...

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