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7. Preference shareholders have the preferential right for repayment of capital in case of winding

up of the company.

8. Preference shareholders also enjoy preferential right to receive dividend.

Merits of Preference Shares:

The merits of preference shares are given as follows:

(i) Preference shares provide reasonably steady income in the form of fixed rate of return and
safety of investment;

(ii) Preference shares are useful for those investors who want fixed rate of return with
comparatively low risk;

(iii) It does not affect the control of equity shareholders over the management as preference

shareholders don’t have voting rights;

(iv) Payment of fixed rate of dividend to preference shares may enable a company to declare

higher rates of dividend for the equity shareholders in good times;

(v) Preference shareholders have a preferential right of repayment over equity shareholders in the
event of liquidation of a company;

(vi) Preference capital does not create any sort of charge against the assets of a company.

Limitations of Preference Shares:
The major limitations of preference shares as source of business finance are as follows:

(i) Preference shares are not suitable for those investors who are willing to take risk and are
interested in higher returns;

(ii) Preference capital dilutes the claims of equity shareholders over assets of the company;

(iii) The rate of dividend on preference shares is generally higher than the rate of interest on

debentures;

(iv) As the dividend on these shares is to be paid only when the company earns profit, there is no

assured return for the investors. Thus, these shares may not be very attractive to the investors;

(v) The dividend paid is not deductible from profits as expense. Thus, there is no tax saving as in
the case of interest on loans.