Page 22 - DMGT409Basic Financial Management

Unit 2: Source of Finance

3. Residual Claim to Assets: Equity shareholders have a residual claim on firm’s assets. In Notes

an event of liquidation of a firm, the assets are used first to settle the claims of outside
creditors and preference shareholders, if anything left that is equity shareholders residue.
4. Voting right/Right to Control: Equity shareholders as real owners of the company they
have voting right, in appointing Directors and Auditors of the company participate and
vote in annual general meeting, which helps to control the company.

5. Limited Liability: This is the prime feature of equity share. Although, equity shareholders
are the owners of the company, their liability is limited to the extent of the investment in
the share.

Preference Shares

Preference share capital gives certain privileges to its holders on the equity shareholders.
Preference shareholders have privileges in two ways:

1. A preferential privilege in payment of a fixed dividend. The fixed dividend may be in the

form of fixed rate or fixed amount per share; and

2. Preferential right as to repayment of capital in case of liquidation/winding up of the
company.

Note Preference share capital is a hybrid form of long-term fi nance, since it has the
features of equity and debentures. Preference share resembles equity in the following
ways:
1. Preference dividends are payable only after tax profi ts (PAT).

2. Payment of preference dividend depends on the discretion of BoD’s, (it is not an
obligatory payment).
3. Preference dividend is not a tax deductable payment.
4. Irredeemable preference shares are long-term in nature (they have no maturity
date).
Preference share capital is similar to debenture capital in the following ways:

1. It carries a fixed rate of dividend.
2. It has prior claim on assets like debenture capital,
3. It normally does not have voting rights.
4. It is redeemable in nature (if it is redeemable preference share).
4. It does not have right to share residual profi ts/assets.

Features of Preference Share Capital

The features of preference share/ capital are as follows:
1. Claim on Assets: Companies does not create any charge on assets while issue of preference
shares, still preference shareholders have prior claim on assets of the company in the
event of liquidation. It means before payment of ordinary shareholders, the preference
shareholders are paid.

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