Similarities and differences between Preference Share Capital and Equity Finance

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

EQUITY FINANCE – For small companies, this is personal savings (contribution of owners to the company). For large companies
equity finance is made of ordinary share capital and reserves; (both revenue and capital reserves).

Similarities between Preference and Equity Finance

  • Both may be permanent if preference share capital is irredeemable (convertible).
  • Both are naked or unsecured finances.
  • Both are traded at the stock exchange
  • Both are raised public limited companies only
  • Both carry residue claims after debt.
  • Both dividends are not a legal obligations for the company to pay.

 

Differences between Preference and Equity Finance

Ordinary share capital

  • Has a residue claim both on assets and profit.
  • Carries voting rights
  • Reduces the gearing ratio
  • Variable dividends hence grow over time
  • Permanent finance
  • Easily transferable

Preference share capital

  • Has a superior claim
  • No voting rights
  • Increases the gearing ratio
  • Fixed dividends hence no growth
  • Usually redeemable
  • Not easily transferable

Similarities between Preference and Equity Finance

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