Preference Capital, however suffers from some serious shortcomings:

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1)   Compared to debt capital, it is an expensive source of financing because the dividend paid to preference shareholders is not, unlike debt interest, a tax-deductible expense.

 

2)   Though there is no legal obligation to pay preference dividends, skipping them can adversely affect the image of the firm in the capital market.

 

3)   Compared to equity shareholders, preference shareholders have a prior claim on the assets and earnings of the firm.

 

 

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