Question

Achieving an increased return on common stock by paying dividends on preferred stock at a rate that is less than the rate of return earned with the assets invested from the preferred stock issuance is called:

Answer 1

Answer:

financial leverage

Explanation:

Preferred stocks are very similar to bonds since they both yield fixed returns. The difference is that interest paid on bonds is called coupon while interest paid on preferred stock are considered dividends. But they essentially are the same, they both represent debt. The advantage of preferred stock is that when a company doesn't make a profit it doesn't need to pay dividends, while it should always pay coupons.

Whenever you take a loan and use it to finance your business activities, it is called financial leverage. When the investment produces a higher return than the interest paid, the company's equity increases.