Define preference shares. State the merits of raising funds

sources-of-business

#1

Define preference shares. State the merits of raising funds through the issue of preference shares.


#2

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).
Merits:

  1. They do not create any change on the assets of the company.
  2. They have the preferential right to repayment of capital over equity shareholders at the time of winding up of the company.
  3. 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.
  4. They provide steady income in the form of fixed rate of return and safety of investment from profitable business.