Advantages Of Preferred Stock Financing

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From the firm's viewpoint the major advantages of preferred stock financing are as follows:

1. Preferred stock financing protects from dilution of control power. Because the preferred stockholders do not have voting right unless the dividend arrears exist. Thus, they do not have voice in the management of the company. Hence, the control power of ordinary shareholders remains preserved.

2.Preferred stock financing increases flexibility in capital structure and dividend payment.Preferred stocks may have call provision which increases the flexibility in capital structure. Besides, dividend can be postponed if earning is insufficient.

3. Preferred stock financing helps to conserve mortgageable assets.

4. Preferred stock financing protects from dilution in earnings. By issuing preferred stocks, the company can avoid the provision of equal participation in earnings that the sale of additional common stock would require and protects from dilution in earnings.

5. Preferred stock financing is less risky than long-term debt financing. If the firm is unable to pay periodic dividend or to redeem preferred stock at maturity, preferred stockholders can not take the company into bankruptcy. Because, from legal point of view, preferred stockholders are owners of the company.

6. Preferred stock financing is permanent source of capital. Typically, preferred stock have no fixed maturity. However, if call provision is included, company can call preferred stock ad redeem them.

From investor's point of view preferred stock financing have following advantages:

1. Preferred stocks provide reasonably regular and stable income as preferred stock dividends are fixed.

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