Question

State the limitations of preference shares.

Answer 1

The limitations of preference shares are as follows :

1. The rate of dividend payable on preference share is higher than the rate of interest on debentures.

2. The claim of equity shareholders over assets of the company is affected by the issue of preference share capital.

3. Investors willing to take a risk and earn higher returns do not prefer preference shares.

4. Since dividend paid is not deductible from profits as an expense, there is no tax saving as in case of interest on debenture or loans.

5. There is no consistent return for the investors because the dividend is payable to the preference shareholders only when the company earns a profit.