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I understand that the company is considering financing business expansion with either preferred or common stock.This memorandum describes the advantages and disadvantages of each of these methods.
Since common stockholders are the ultimate owners of the company, issuance of additional common stock dilutes ownership and control of the existing shareholders.Also issuance of too much common stock may increase the firm's overall cost of capital.
Preferred stock is a hybrid security. It is equity but generally carries a fixed dividend rate that must be paid before common shareholders receive dividends. An advantage of issuing preferred stock is that preferred shareholders do not generally participate in superior earnings of the firm.In addition, common shareholders do not give up control of the firm.
Feel free to contact me if you need any additional information about these alternative forms of financing.
Keywords: expansion, preferred, common, stock, dividend, shareholders, control, ownership, cost, capital