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You are an analyst for a company. Your CEO asks you to asses the relative risk of two potential preferred equity investments. Your analysis indicates these two companies are identical in all aspects of both returns and risks with exception of their financing composition. The first company is financed twenty percent by debt, twenty percent from preferred equity, and sixty percent from common equity. The second company is financed thirty percent by debt, ten percent from preferred equity, and sixty percent from common equity. Which company presents the greater preferred equity risk? And why?
on the outset first company but at the same time consider overall the second company is better as it does have debts lower than the first one.As debt carries interest it dilute your cashflow by way of interset.Preferred equity can also be converted into common equity when the liquidity does not permit us to pay off Kindly enlighten me
The company having 20% preferred equity is having greater preferred equity risk.
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