Question

Assertion :Preference shares capital is a more costly source of finance than debentures for profit-earning companies. Reason: Preference dividend is not a charge against profit under the Income Tax Act.

• A. Both Assertion and Reason are correct and Reason is the correct explanation for Assertion
• B. Both Assertion and Reason are correct but Reason is not the correct explanation for Assertion
• C. Assertion is correct but Reason is incorrect
• D. Assertion is incorrect but Reason is correct.

Answer 1

The correct option is A Both Assertion and Reason are correct and Reason is the correct explanation for Assertion

Both Assertion and Reason are correct and Reason is the correct explanation for Assertion.

Preference shares have a fixed percentage dividend before any dividend is paid to the ordinary shareholders. As with ordinary shares a preference dividend can only be paid if sufficient distributable profits are available, although with 'cumulative' preference shares the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders.