Preference Capital

Preference Capital

Preference capital is a type of capital that has a higher claim on the assets and earnings of a company than ordinary shares. Preference shareholders have a right to receive a fixed dividend before any dividends are paid to ordinary shareholders. They also have a priority claim on the assets of the company in the event of liquidation.

Here are some of the key features of preference capital:

  • Fixed dividend: Preference shareholders have a right to receive a fixed dividend, which is usually paid out every quarter.
  • Priority on assets: In the event of liquidation, preference shareholders have a priority claim on the assets of the company after all debts have been paid.
  • No voting rights: Preference shareholders do not have voting rights, unlike ordinary shareholders.

MCQs on Preference Capital

  1. Which of the following is not a feature of preference capital?
    • Fixed dividend
    • Priority on assets
    • Voting rights
    • Cumulative dividend

The answer is Voting rights. Preference shareholders do not have voting rights, unlike ordinary shareholders.

  1. Which of the following is the most important feature of preference capital?
    • Fixed dividend
    • Priority on assets
    • Voting rights
    • Cumulative dividend

There is no one-size-fits-all answer to this question, as the most important feature of preference capital will vary depending on the situation. However, fixed dividend is often considered to be the most important feature of preference capital because it provides investors with a steady stream of income.

  1. Which of the following is a type of preference capital?
    • Cumulative preference shares
    • Non-cumulative preference shares
    • Redeemable preference shares
    • All of the above

The answer is All of the above. There are three main types of preference capital: cumulative preference shares, non-cumulative preference shares, and redeemable preference shares.

Cumulative preference shares: Cumulative preference shares entitle shareholders to receive all unpaid dividends in arrears before any dividends are paid to ordinary shareholders.

Non-cumulative preference shares: Non-cumulative preference shares do not entitle shareholders to receive unpaid dividends in arrears.

Redeemable preference shares: Redeemable preference shares are preference shares that can be redeemed by the company at a specified date.

Conclusion

Preference capital is an important source of financing for companies. It is a hybrid of debt and equity, as it has some features of both. Preference shares can be a good investment for investors who are looking for a steady stream of income.

Here are some additional tips for investing in preference capital:

  • Understand the terms of the preference shares. This includes the dividend rate, the priority on assets, and the redemption terms.
  • Compare the terms of the preference shares to other investment options.
  • Invest only in preference shares from reputable companies.

By following these tips, you can make informed decisions about investing in preference capital.