Preferred shares are defined as being a form of equity by the Canada Business Corporations Act (CBCA). Preferred shares generally have a specified dividend rate and in the event of bankruptcy or liquidation have priority over common shares. However, preferred shares do not have a residual interest in the entity.

Required:
a. Why is residual interest central to the value of common shares?
b. Identify qualities of preferred shares that make them similar to debt financing; identify qualities that make them similar to equity financing.
c. Discuss three reasons why management would want to use preferred shares as a source of financing.