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The directors of a company have …

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The directors of a company have decided to modernise the plants and machinery at an estimated cost of ₹1 crore, but could not decide whether to issue preference shares or debentures for this purpose. As finance manager of the company, advise the directors whether to issue preference shares or debentures in the internet of the company

Posted by Natasha Mishra 4 years, 1 month ago

CBSE > Class 11 > Business Studies

1 answers

Gaurav Seth 4 years, 1 month ago

As a finance manager of the company, I would advice the directors to issue the preference shares as by issuing preference shares, a company is benefited in the following ways.

1. Lifetime retention - A company need is not bound to repay the preference share capital amount during its lifetime.

2. No charge on company's assets - The preference shareholders have no right on the assets of the concerned company. So in this manner, they have no right to claim any amount (by selling-off company's assets) in case the company fails to make dividend payments.

3. No obligation - In case, the company incurs losses, then it is not required to pay dividend to its preference shareholders.

On the other hand, debentures will not be chosen because of the following demerits of debentures.

1. The legal boundation of a company to pay interest on debentures increases its payment obligations .
2. The borrowing capacity of a company gets limited with further issue of debentures.

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