Question : Case Study: PQR Enterprises - Funding Strategies for Diversification
PQR Enterprises is a well-established conglomerate planning to diversify its business operations. The company is evaluating various sources of business finance to support its diversification plans.
Questions : Equity Shares and Preference Shares
How can PQR Enterprises raise funds through convertible preference shares?
Option 1: By issuing shares at a discount
Option 2: By converting shares into debentures
Option 3: By allowing conversion into equity shares
Option 4: By offering fixed interest payments
Correct Answer: By allowing conversion into equity shares
Solution : The correct answer is (c) By allowing conversion into equity shares
Convertible preference shares grant the shareholder the right to convert these shares into equity shares at a predetermined conversion ratio and within a specified time frame. This allows the preference shareholders to become equity shareholders and participate in the ownership and growth of the company. It provides flexibility to the shareholders while potentially leading to an increase in equity capital for the company if the conversion option is exercised. This is a common way for companies to raise funds while attracting investors. Options a, b, and d are not accurate methods for raising funds through convertible preference shares.
How do preference shares differ from equity shares in terms of dividend payments?
Option 1: Preference shares pay higher dividends
Option 2: Equity shares pay fixed dividends
Option 3: Preference shares have no voting rights
Option 4: Equity shares have no redemption option
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