Achieving an increased rate of 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 strategy is known as financial leverage, which allows a company to increase the return on common stock by using borrowed funds to invest in assets with a higher rate of return than the cost of borrowing. By paying dividends on preferred stock at a rate lower than the return earned from the assets funded by the preferred stock issuance, the company can benefit from the difference and increase the earnings available to common stockholders. This approach is a common practice in corporate finance and can help to maximize shareholder value. The other options, such as discount or premium on stock, preemptive right, or capital gain, do not apply to this scenario.

Achieving an Increased Rate of Return on Common Stock by Paying