Preference Capital has the following Advantages:
1)Â Â There is no legal obligation to pay preference dividend. A company does not face bankruptcy or legal action if it skips preference dividend.
2)Â Â There is no redemption liability in the case of perpetual preference shares. Even in the case of redeemable preference shares, financial distress may not be much because:
(i)Â Â Â Â Â Â Â Â Â Periodic sinking fund payments are not required
(ii)Â Â Â Â Â Â Â Â Redemption can be delayed without significant penalties
3)Â Â Preference capital is generally regarded as part of net worth. Hence, it enhances the creditworthiness of the firm.
4)Â Â Preference shares do not, under normal circumstances, carry voting right. Hence, there is no dilution of control.
51 Comments