In a situation in which the company has poor cash flows, common stock is the best source of financing because there are no required dividend payments and the dividends do not accumulate for common shares like they may with preferred shares.
While the replacement of debt with preferred stock is a step in the right direction, replacing the debt with common stock would be better than preferred stock because preferred stock may have cumulative dividends that are earned every period, even if they are not paid.
Replacing common stock with debt is the opposite of what the company should do because debt requires a payment of interest each period, and common stock does not require the payment of dividends each period.
If the company is having cash flow problems, it will want to change its financing to common stock. This is because debt must have the interest paid every period, even when there are poor cash flows. Common stock does not need to have dividends paid every period. Common stock is better than preferred stock in this situation because the preferred stock dividends are often earned, even if they are not paid. This will place a secondary cash burden on the company because these dividends will need to be paid at some point in the future.
|
