The cost of preferred stock is typically higher than the cost of long-term debt (bonds) because the cost of long-term debt (interest) is tax deductible.

Question

Quizplus · Accepted Answer

The cost of long-term debt in the form of interest payments is tax deductible for the issuing company, which reduces the effective cost of debt to the company. However, preferred stock dividends are not tax deductible, making the cost of preferred stock higher than the cost of long-term debt.

The Cost of Preferred Stock Is Typically Higher Than the Cost