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Advantage of preference shares:
Suitable to cautions investors:
This is suitable for investors who do not like risk and who like to get fixed dividend.
Retention of control:
The existing shareholders can retain their control over the company by issuing preference shares because the preference shareholders can vote only on matters affecting them. So there will be no dilution of control.
Redeemable, convertible and participating preference shareholders are more attractive. There are very helpful to investors and so they have ready market.
In case of debentures, generally a change (or) mortgage on the assets is created. But the issue of preference share require no such creation.
Increase in equity shareholder’s income:
Equity shareholders will get good amount of dividend by issue of preference shares.
Conversion to satisfy legal requirements:
The public deposits of companies which are in excess of companies which are in excess of the maximum limit fixed by issuing preference shares.
Comparing to equity shares, financing preference shares is less costly, so they can be issued for meeting heavy capital expenditure.
Enabling reconstruction and reorganization:
Whenever a company is reorganized (or) reconstructed, the board with the consent of the creditors, can easily convert the debts into preference shares.
Increasing the marketability:
The preference shares can be utilized for raising the value of the equity shares and debentures in the open market. Everyone who purchase certain number of equity shares may be provided with certain number of preference shares as bonus.
Good alternative for debentures:
The company having an average annual return but not stable income to provide for regular debenture interest, can issue preference shares as an alternative to the debentures.
Disadvantages of Preference Shares:
Usually, preference shares carry a higher rate of dividend than the rate of interest on debentures.
Accumulation of dividend:
In case of cumulative preference shares, arrears of preference dividend accumulate. It is a permanent burden for the company.
Comparing to debentures, financing of preference shares in more costly.
No voting rights:
Since preference shares have no voting rights, the interest of the preference shareholders may be damaged by the equity shareholders.
Way to liquidation:
Sometimes, instead of using the available limited cash for productive purpose, the board may give it to preference shareholders as dividend. In the long run, this may lead to insolvency.
Affecting the financial status:
The credit worthiness of the company may be affected by existence of preference shares.
Time of redemption:
if the board redeem the deducted for income tax purpose, the company has to earn more. Otherwise, the dividend to equity shareholders will be affected.