Define preference shares. State the merits of raising funds through the issue of preference shares.
Mention any three advantages of preference shares from a company’s point of view. jAns. Preference shares are those shares that enjoy certain priorities regarding the payment of dividend at a fixed rate and return of investment (capital).
- They do not create any change on the assets of the company.
- They have the preferential right to repayment of capital over equity shareholders at the time of winding up of the company.
- Since the dividend payable to preference shareholders is fixed, a company is in a position to declare high rates of dividend for equity shareholders during favourable times.
- They provide steady income in the form of fixed rate of return and safety of investment from profitable business.