No matter how much the operating profit of an enterprise is, the interest on debt and the dividend on preferred stock are fixed. When the income before interest and tax increases, the fixed financial expenses borne by each yuan of income will be relatively reduced, which can bring more income to ordinary shareholders. The influence of this kind of debt on investors' income is called financial leverage, which affects the enterprise's profit after interest and tax rather than the income before interest and tax.
Extended data:
There are two types of callable preferred stock: compulsory redemption and arbitrary redemption.
1. Compulsory redemption: When issuing, it is stipulated that the joint-stock company has the option to redeem or not to redeem. Once the issuing company decides to redeem the shares according to the stipulated conditions, the shareholders have no choice but to return the shares. And shareholders have no initiative.
2. Arbitrary redemption: Shareholders have the right to choose whether to require the joint-stock company to redeem. If the shareholders are unwilling to continue to hold shares within the prescribed time limit, the joint-stock company shall not refuse to buy back the shares according to the redemption clause.
Baidu Encyclopedia-Redeemable Preferred Stock
Baidu encyclopedia-financial leverage