Multiple Choice
Preferred stock ______.
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12. Stockholders' Equity
Preferred Stock
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Which of the following is NOT a reason that a corporation would issue preferred stock?
A
To raise capital without diluting common shareholders' control
B
To gain voting control over other corporations
C
To attract investors seeking fixed dividends
D
To avoid increasing the corporation's debt-to-equity ratio
Verified step by step guidance1
Understand the concept of preferred stock: Preferred stock is a type of equity security that typically provides fixed dividends and has priority over common stock in the event of liquidation. It does not usually grant voting rights to shareholders.
Analyze the reasons why corporations issue preferred stock: Corporations may issue preferred stock to raise capital without diluting common shareholders' control, attract investors seeking fixed dividends, or avoid increasing the debt-to-equity ratio since preferred stock is considered equity rather than debt.
Evaluate the option 'To gain voting control over other corporations': Preferred stock generally does not grant voting rights, so issuing preferred stock would not help a corporation gain voting control over other corporations. This makes it an unlikely reason for issuing preferred stock.
Compare the other options: The other options align with the typical reasons for issuing preferred stock, such as raising capital, attracting investors, and managing the debt-to-equity ratio.
Conclude that the correct answer is the option that does not align with the characteristics or purposes of preferred stock, which is 'To gain voting control over other corporations.'
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