To answer this question, let's go through each option to understand why it is correct or incorrect:
Option A) Debt/Total capital ratio will improve.
This option is incorrect because when the company issues preferred shares, it increases its total capital. As a result, the debt/total capital ratio will actually deteriorate, not improve.
Option B) Interest coverage ratio will deteriorate.
This option is correct. The interest coverage ratio measures a company's ability to cover its interest expenses with its operating income. When the company issues preferred shares with a fixed dividend, it adds an additional fixed expense to its financial obligations. This can reduce the company's ability to cover its interest expenses and therefore lead to a deterioration in the interest coverage ratio.
Option C) Preferred shareholders will rank below debt holders should the company file for bankruptcy.
This option is correct. In the event of bankruptcy, debt holders have a higher priority in receiving their claims compared to preferred shareholders. Debt holders have a legal claim on the assets of the company and are typically paid first before any distributions are made to preferred shareholders.
Option D) None of the above.
This option is incorrect because option A is least likely to be correct, as explained above.
The correct answer is A) Debt/Total capital ratio will improve. This option is least likely to be correct because issuing preferred shares increases total capital and therefore deteriorates the debt/total capital ratio.
Therefore, the correct answer is A) Debt/Total capital ratio will improve.