Question:
Preference shares are preferred by company but not by investors. Why?
Answer:
Preference shares have a filed percentage dividend before any dividend is paid to the ordinary shareholders. As with ordinary shares a preference dividend can only be paid if sufficient distributable profits are available, although with ‘cumulative’ preference shares the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders.
From the company’s point of view, preference shares are advantageous in the following ways:
- Dividends do not have to be paid in a year in which profits are poor, while this is not the case with interest payments on long term debt (loans or debentures).
- Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not.
- Unless they are redeemable, issuing preference shares will lower the company’s gearing. Redeemable preference shares are normally treated as debt when gearing is calculated.
- The issue of preference shares does not restrict the company’s borrowing power, at least in the sense that preference share capital is not secured against assets in the business.
- The non-payment of dividend does not give the preference shareholders the right to appoint a receiver, a right which is normally given to debenture holders.
However, dividend payments on preference shares are not tax deductible in the way that interest payments on debt are. Furthermore, for preference shares to be attractive to investors, the level of payment needs to be higher than for interest on debt to compensate for the additional risks.
For the investor, preference shares are less attractive than loan stock because:
- They cannot be secured on the company’s assets.
- The dividend yield traditionally offered on preference dividends has been too low to provide an attractive investment compared with the interest yields on loan stock in view of the additional risk involved.
Sources of Business Finance
Q 1.
Write a note on international sources of finance.
Q 2.
In leasing agreement what right is given to lessee?
Q 3.
What is a commercial paper? What are its advantages and limitations?
Q 5.
Name two sources of funds under owner's fund.
Q 6.
Explain in detail the types of debenture a company can issue.
Q 7.
Which deposits are directly raised from the public?
Q 8.
Explain trade credit and bank credit as sources of short term finance for business enterprises.
Q 9.
State two factors affecting the working capital requirement of a firm.
Q 10.
What advantage does issue of debentures provide over the issue of equity shares?
Q 11.
Differentiate between a share and a debenture.
Q 12.
What is business finance? Why do businesses need funds? Explain.
Q 13.
What is lease financing? Discuss its merits and demerits.
Q 14.
Specify the objective of I.D.B.I.
Q 15.
Give the full form of GDR and ADR.
Q 16.
Why does business enterprise need finance?
Q 17.
What is factoring? Discuss its pros and cons.
Q 18.
Discuss the financial instruments used in international financing.
Q 19.
Why is equity share capital called Risk Capital'?
Q 20.
Who regulates the acceptance of public deposits?
Q 21.
State the meaning of finance. What factors determine working capital and fixed capital requirements of a business?
Q 22.
What do you mean by discounting of bills of exchange?
Q 23.
Name any three special financial institutions and state their objectives.
Q 24.
Preference shares are preferred by company but not by investors. Why?
Q 25.
State various sources of short and medium term funds.
Q 26.
What are public deposits?
Q 27.
What are Indian depository receipts (IDRs)?
Q 28.
What is the status of debenture holders?
Q 29.
Explain different types of preference shares which can be issued by a company.
Q 30.
Describe in brief the features of equity shares.
Q 31.
Why preferences are given to preferential shares?
Q 32.
Retained earnings are not a good source from the values point of view as it is the right of equity shareholders. Do you agree? Justify your answer.
Q 33.
Name zones of the Lessors and Lessees in India.
Q 34.
What are the two important functions of factors?
Q 35.
Mr. John has ? 1,00,000 for investment purposes. Should he invest in equity shares, preference shares, public deposits or debentures? Justify your answer.
Q 36.
Who are called the owners of a company?
Q 37.
What are the preferences given to preference shareholders?
Q 38.
What preferential rights are enjoyed by preference shareholders? Explain.
Q 39.
What are retained profits? Discuss their advantages and disadvantages.
Q 40.
State two factors affecting the fixed capital requirement of a firm.
Q 42.
What is a trade credit?
Q 43.
Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.
Q 44.
List sources of raising long-term and short term finance.
Q 45.
Preference shares are not suitable for which kind of investors?
Q 46.
Describe briefly the factors responsible for selecting a source of finance.
Q 47.
Write a short note on the features of GDRs.
Q 48.
Classify internal and external sources on the basis of time.
Q 49.
As a source of finance retained profit is better than other sources. Do you agree with this view? Give reasons for your answer.
Q 50.
What are retained earnings?
