Question : Case Study: XYZ Ltd. - Raising Finance for Expansion
XYZ Ltd. is a growing company that manufactures electronic gadgets. The company has been successful in the market and is planning to expand its operations. To finance this expansion, XYZ Ltd. is considering various sources of business finance.
Questions : Equity Shares and Preference Shares
Preference shareholders of XYZ Ltd. are entitled to:
Option 1: Convert their shares into debentures
Option 2: Voting rights in company decisions
Option 3: A fixed dividend before equity shareholders
Option 4: A share of the company's profits after equity shareholders
Correct Answer: A fixed dividend before equity shareholders
Solution : The correct answer is (c) A fixed dividend before equity shareholders
Preference shareholders are entitled to receive a fixed dividend at a predetermined rate before any dividend is paid to equity shareholders. This characteristic distinguishes them from equity shareholders, who may receive variable dividends based on the company's profitability and decisions made by the board of directors. However, preference shareholders typically do not have voting rights in the company's decisions, and their shares usually cannot be converted into debentures.
What is the main characteristic of equity shares?
Option 1: Fixed dividend payments
Option 2: No voting rights
Option 3: Ownership in the company
Option 4: Guaranteed redemption
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