Critically examine the factors that necessitate the issue of preference shares by companies. ii. Most companies in our part of the world prefer to be financed by ordinary capita
i. Critically examine the factors that necessitate the issue of
ii. Most companies in our part of the world prefer to be
financed by ordinary capital to preference capital. Discuss
Solution:
i) Preference Shares are one of the financial instrument, are commonly referred to as Preferred Stock, is a part of the Equity/capital of the stock issued by the company to a certain small percentage of preference shareholders and offers preferential payment of dividend in the event of liquidation preceding to the common shareholders and also giving a steady flow of dividend payment prior to the common shareholders. They have limited control than the common shareholders and they have no voting rights as when compared to the common shareholders. They act as secured creditors of the company. Preferred stock is issued for maintaining the debt to equity ratio lower than issuance of bonds.
Preferred stock is ranked higher than Common stock but they still come after Debentures. Debentures are issued by a company but not secured by an asset. In the risk aspect, Debentures are less risky than Preferred stock because Debenture have liquidation rights prior to preferred stock in the event of liquidation occur.
A primary consideration for choosing preferred stock depends on the risk factors when the company wants to generate funds through the financial instruments, conditions prevailing in the market.
Step by step
Solved in 2 steps
