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Sources Of Business Finance

Question
CBSEENBS11004292
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Why do some companies prefer to raise capital by the issue of preference shares ? What is its limitations ?

Solution
Some companies prefer to raise capital by the issue of preference shares because preference shares have these merits :

1. It helps enlarge the sources of funds as some financial institutions and individuals prefer to invest in preference shares due to the assurance of a fixed return. This helps the company attract investors.

2. Dividend is payable only when there are profits. These are not fixed liabilities as in the case with loans and borrowings.

3. A higher return is possible if the company is in good times, as in the case of participating preference shares.

4. It does not affect the equity shareholders control over management.

Limitations are as follows :

1. Dividend paid cannot be charged to the company’s income as an expense; hence there is no tax saving as in the case of interest on loans.

2. Issue of preference shares does not attract many investors as there is no assured return, and the return is generally low and lesser than the rate of interest on loans.

3. The holders of preference shares have a right to vote on any resolution of the company directly affecting their rights, which includes any resolution for winding-up the company, repayment or reduction of its share capital, etc.

Some More Questions From Sources of Business Finance Chapter

Give meaning of working capital.

Give types of working capital.

Give meaning of owner’s capital.

Give meaning of borrowed capital.

Give meaning of long-term finance.

Give meaning of medium-term finance.

Give meaning of short-term finance.

Define shares.

 Give the types of shares.

Define preference shares. 

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