Preference Capital, however suffers from some serious shortcomings:
1)Â Â 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)Â Â 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)Â Â Compared to equity shareholders, preference shareholders have a prior claim on the assets and earnings of the firm.
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