The textbook labels preferred stock as “hybrid equity financing.” Iden

The textbook labels preferred stock as “hybrid equity financing.” Identify and explain the features of preferred stock that give it the designation of “hybrid equity financing.”

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ANSWER

Answer: Preferred stock is identified as a hybrid equity security because even though it is equity, it has features of debt as well. Like stock, it has no specific maturity and the principal is usually not repaid. Like debt, preferred stock does not ordinarily have voting rights but under certain conditions it may be converted to common stock. Preferred stock’s annual dividend at a set rate is like the coupon payments on a bond.