Why is yield on preferred lower than kd?

© 1998 The Dryden Press

• Corporations own most preferred stock, because 70% of preferred dividend are nontaxable to corporations.

• Therefore, preferred often has a lower B-T yield than the B-T yield on debt.

• The A-T yield to an investor, and the A-T cost to the issuer, are higher on preferred than on debt. Consistent with higher risk of preferred.

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