The Schweser material summary: From the perspective of the issuer, the advantages of issuing perferred stock is to create a debt/equity hybrid security. The analyst treatment would be: * Classify redeemable preferred shares as debt and dividends as interest (expense???) * Classify variable-rate shares as short-term liabilities (same as short-term debt?) I’m wondering what would be analyst treatment of pf. stocks in general? See below. XYZ had a capital structure of $10M L and $15M E It then issued $0.7M preferred shares and $1M bonds with warrants (of which 80% component is debt) for a total cash proceeds of $1.7M Which of the following is the revised debt/total capital ratio? A. 0.404 B. 0.431 C. 0.679 D. 0.757
C Preferred stock is equity (in the question seems to be straight preferred). The bonds with warrants should be 80% debt and 20% equity (the warrants) (10M+0.8M)/(15M+0.7M+0.2M)=0.679
A I think the qn asks debt to Total capital… 10.8/26.7 = .404.
Ups, I read D/E, stupid me.
Thanks very much. So unless specified, prf. stocks would be treated as equity. Great!