Preference Share Capital

Preference share capital is a type of capital that is issued by a company to raise funds. Preference shares have some features of debt and some features of equity.

Features of preference share capital:

  • Fixed dividend: Preference shareholders are entitled to receive a fixed dividend, which is usually paid out quarterly. The dividend is usually cumulative, which means that if the dividend is not paid in a particular year, it will be carried over to the next year and paid out then.
  • Priority over common shareholders: In the event of liquidation, preference shareholders have priority over common shareholders to receive their investment back. This means that preference shareholders will be paid out before common shareholders.
  • No voting rights: Preference shareholders do not usually have voting rights. This means that they do not have a say in the management of the company.

Types of preference shares:

There are two main types of preference shares:

  • Cumulative preference shares: These shares have a fixed dividend that is paid out even if the company is not profitable.
  • Non-cumulative preference shares: These shares do not have a fixed dividend. If the company is not profitable, the dividend is not paid out.

Multiple choice questions:

  1. Which of the following is not a feature of preference share capital?
    • Fixed dividend
    • Priority over common shareholders
    • Voting rights
    • Cumulative dividend
    • The answer is Voting rights. Preference shareholders do not usually have voting rights.
  2. The dividend on preference shares is usually:
    • Fixed
    • Variable
    • Cumulative
    • Non-cumulative
    • The answer is Fixed. The dividend on preference shares is usually fixed and is paid out quarterly.
  3. In the event of liquidation, preference shareholders have priority over common shareholders to receive their investment back. This means that:
    • Preference shareholders will be paid out before common shareholders
    • Common shareholders will be paid out before preference shareholders
    • Both preference and common shareholders will be paid out equally
    • The preference shareholders will not be paid out
    • The answer is Preference shareholders will be paid out before common shareholders.
  4. Which of the following is a factor to consider when issuing preference shares?
    • The amount of capital needed
    • The risk appetite of the investors
    • The tax implications of the security
    • All of the above
    • The answer is All of the above. All of these factors are considered when issuing preference shares.