Question : Case Study: ABC Corporation - Financing Growth Strategies
ABC Corporation, a leading manufacturing company, is looking to finance its growth strategies. The company is exploring various sources of business finance to achieve its expansion goals.
Questions : Equity Shares and Preference Shares
What is the main advantage of preference shares for companies like ABC Corporation?
Option 1: No dilution of ownership
Option 2: Higher dividend payouts
Option 3: Strong voting rights
Option 4: Fixed interest payments
Correct Answer: No dilution of ownership
Solution : The correct answer is (a) No dilution of ownership
Preference shares allow companies to raise funds without diluting ownership stakes or control. Unlike issuing additional common equity shares, issuing preference shares does not dilute the ownership of existing shareholders because preference shareholders do not have voting rights and do not participate in the day-to-day decision-making of the company. It allows the company to secure necessary capital while maintaining ownership concentration among existing shareholders. The fixed dividend payments associated with preference shares (option b) are also a characteristic but are not directly related to the advantage of no dilution of ownership.
Which feature makes equity shares different from preference shares?
Option 1: Fixed dividend payments
Option 2: Ownership rights in decision-making
Option 3: Redemption option
Option 4: No voting rights
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