Question

From a company's view point what are the advantages and disadvantages of issuing preferences shares?

Answer 1

Advantages

1. Preference shares donot have voting rights. Hence they donot diliute the ownership of the company.

2. Preference shares carry low risk to the investor. This means the cost of capital to the issuing company is low as compared to equity shares.

3. If callable preference shares are issued, companies can repurchase them if the interest rates fall and reissue them at a lower interest rates. this will reduce the cost of capital.

4. Financing through preference shares lowers the debt equity ratio showing the company is well managed.

5. Company can postpone payment of dividend incase of cumulative preference shares if there are not sufficient profits in a year

6. Preference Shares donot create any charge of assets of the company.

7. Redeemable preferece shares can be repaid once there is no need. There is no danger of overcapitalisation and the capital structure will remain elastic.

8. Preference can be tailored as per the needs of the investors.

Disadvantages

1. Preference shares cost more than debt.

2. Dividend on preference share is fixed and has to be paid before paying any dividend to equity shareholders

3. Not much appeal to bold investors.