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Define preference shares used in financial management.
These shareholders have preferential right to get dividend and initial investment at the time of winding up the company. They get fixed dividend and they don’t have voting rights.
Preference share are classified into following types
Cumulative preference shares − They have right to claim dividends for years, which does not have no profits. They have right to get comparative dividend for previous years, if the company earned profit
Non-cumulative preference shares − They don’t have right to the rights, that have been enjoyed by cumulative preference shareholders. They have only earned dividend, if the company is earning profits.
Redeemable preference share − If preference share has a fixed maturity period, those are called redeemable preference share. The company act has provided certain restrictions on return of these shares.
There is no maturity period in these shares. These shares can be redeemed only when company goes for liquidator.
Participating preference shares − they have right to get extra profits after distributing to equity shareholders
Non-participating shares\\ they don’t have any right to get extra profit like participating preference shareholders. They have fixed rate of dividend is paid to these shareholders.
Convertible preference shares − these shareholders have right to convert their share into equity shares after a specific period.
Non-convertible preference shares − they don’t have right to convert their shares like convertible shareholders
Features of preference shares
- Maturity period.
- Residual claims on income.
- Residual claims on assets.
- Control of management.
Advantages
- Fixed dividend.
- Cumulative dividends.
- Redemption.
- Participation.
- Convertibility.
Disadvantages
- Expensive source of finance.
- No voting right.
- Fixed dividend only.
- Permanent burden.
- Taxation.
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