Answered: The capital of Fever Grass Ltd.…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

The capital of Fever Grass Ltd. consists of fully paid up ordinary and preference shares. The governing regulations of Fever Grass Ltd. provide as follows: "17(a) Preference shareholders shall receive a cumulative preference dividend of 5% half yearly; and (b) Two votes shall be attached to each preference share issued." Due to an outbreak of the Pink Mealy bug disease, the production of bush tea has dramatically declined. The board of directors of Fever Grass Ltd. propose to alter clause 17(a) of the governing regulations to reduce the preference dividend from 5% to 2 % and to move a resolution to increase the voting rights of ordinary shareholders. Advise the preference shareholders

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Step 1

Preference shareholder distributions are frequently reduced when a company faces financial challenges and must make cost reductions. The board of directors may decide to limit or halt payments to preference shareholders in this situation in order to save money. Companies may find it challenging to make this choice because doing so could enrage these investors and result in legal action. However, if a business is really having trouble, this can be the only way to protect cash flow and keep the operation afloat.