Interest on bonds is deductible for tax purposes; dividends on preferred share issues are not. Assume that a company can raise $100 million either by assuming bonds promising 12 percent annual interest or by issuing preferred shares, convertible into common shares promising 12 percent annual dividends. The firm expects to continue to have income (in excess of all interest payments) taxable at the rate of 40 percent per year. The company would prefer to:

-Issue the preferred shares

-Issue the bonds at a premium

-None of the other alternatives are correct

-Cannot be determined without considering the underlying risk

-Issue the bonds at a discount

Answer rating: 100% (QA)

Answer Explanation In that case the ability to convert their shares to common shares is an advantage ... View the full answer