Achieving an increased return on common stock by paying dividends on preferred stock at a rate that is less than the rate of return earned with the assets invested from the preferred stock issuance is called:
A)Financial leverage.
B)Discount on stock.
C)Premium on stock.
D)Preemptive right.
E)Capital gain.

Question

Quizplus · Accepted Answer

This situation is known as financial leverage, where the company is using borrowed funds (preferred stock issuance) to earn a higher return on their common stock. By paying a lower rate of return on preferred stock than the return earned on the assets invested from that issuance, the company is essentially using the difference to increase the return on their common stock.

Achieving an Increased Return on Common Stock by Paying Dividends