Similarities and differences between Preference Share Capital and Debt Capital

Debt finance is a fixed return finance as the cost (interest) is fixed on the par value (face value of debt). It is ideal to use if there’s a strong equity base. It is raised from external sources to qualifying companies and is available in limited quantities.

Preference Share Capital (Quasi-Equity)
It is also called quasi-equity because it combines features of equity and those of debt. It is preference because it is preferred to ordinary share capital

Similarities between Debt and Preference Share Capital

  • Both have fixed returns.
  • Both will increase the company’s gearing ratio.
  • Both are usually redeemable.
  • Both do not have voting rights.
  • Both may force the company into receivership
  • Both have superior claims over and above owners.
  • Both are external finances.
  • There is no growth with time.

 

Differences between Preference Share Capital and Debt

DEBT

  • Interest is tax allowable
  • Interest is a legal obligation
  • Debt finance is always secured
  • Debt finance is a pre-conditional
  • Has a superior claim

 

PREFERENCE SHARE CAPITAL

  • Dividends are not tax allowable
  • Dividends are not a legal obligation
  • Preference is not secured finance
  • Is not conditional finance
  • Has a residue claim (after debt)

Similarities and differences between Preference Share Capital and Debt Capital

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