Bring out merits of financing through preference shares.

1. Financing through preference shares is a flexible financing arrangement, since payment of dividend is not a legal obligation of the company in issuing the preference shares. If earning declines and the financial condition of the company deteriorates, the company can omit to pay the dividend.

2. Preference shares have long maturity date and thus, in sense, the funds provided by them is a sort of long-term loan. They give sufficient flexibility to the company by allowing it to make interest payments or planning for repayment of principal.

3. Preference shares add to the equity base of the company and thereby strengthen its financial positions. Additional equity base enhances the ability of the company to borrow in future.

4. Preference shares capital also is a sort of cushion to the debentureholders and thus they save the company from paying higher rate of interest.

5. Issue of preference shares does not create any sort of charge against assets of the company. Thus the assets, are freely available for raising additional funds from any other sources.

6. Preference shares are entitled to a fixed rate of dividend. The company, may, therefore, pay dividend to the equity shareholders at a rate higher than the overall return on investment (ROI) and thus take advantage of trading on equity.

7. Issuing the performance shares does not materially disturb the existing pattern of control of the company as compared to the issue of equity share since preference share holders are entitled to vote only on such resolutions which directly affect their interests.

8. Financing through preference share is cheaper as compared to financing through equity shares.

9. Preference shares are particularly useful for those investors who want higher rate or return with comparatively lower risk.

10. The company can utilize huge surplus funds at its disposal by redeeming the redeemable preference shares as per provisions of the Companies Act.