Preference capital represents a hybrid form of financing – it takes some characteristics of equity and some attributes of debentures.
It resembles equity in the following ways:
(i)Â Â Â Â Â Preference dividend is payable only out of distributed profits
(ii)Â Â Â Â Preference dividend is not an obligatory payment (the payment of preference dividend is entirely within the discretion of the directors)
Preference capital is similar to debentures in several ways:
(i)Â Â Â Â Â The dividend rate of preference capital is usually fixed
(ii)Â Â Â Â The claim of preference shareholders is prior to the claim of equity shareholders
(iii)Â Â Â Preference shareholders do not normally enjoy the right to vote
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