Why is preferred stock more expensive for the issuing firm than debt financing?

1. Interest on debt is a tax-deductible expense, which lowers the true cost of borrowing. 2. Preferred dividends are not tax-deductible, so the firm bears their full cost. 3. On top of that, the claims of preferred stockholders on income and assets are second to those of debtholders. 4. Preferred stockholders therefore require higher returns to compensate for the greater risk they carry. 5. Like debt, preferred stock raises financial risk because it obligates the firm to make a fixed payment. 6. But it is more flexible than debt: the firm can miss a preferred dividend without the serious consequences of failing to repay a debt, which is why holders cannot force bankruptcy. _Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.5 Equity Financing_