Equity shares and preference shares

1. TYPES OF SHARES

2. Shares
Equity Shares
Preference
Shares

3. EQUITY SHARES
• Enjoy dividend- share of profit
• Right to participate in the management
• Also called ordinary shares
• Equity share holders are the real Owners and risk bearers
• At the time of winding up capital is paid back to them after
settling all the claims

4. ADVANTAGES
• Company has no liability to pay it
• No fixed dividend obligation
• No charge created over the assets of the company
• Shareholders control the company
• Liability of investor is limited
• High dividends
• No collateral security needed

5. DISADVANTAGES
• Dividend for shareholder not taxable but company should pay tax
• High cost of issue
• Manipulation of few shareholders
• Dividend at the discretion of directors
• High risk
• Residual claim

6. PREFERENCE SHARES
• Preference in case of dividend and capital repayment
• Dividend before equity shareholders
• Dividend rate is fixed

7. PREFERENCE SHARES
Cumulative Preference Shares
Right to dividend. Dividend is accumulated
Non- Cumulative Preference Shares
Cannot be accumulated
Participating Preference Shares
Right to participate in the profits in addition to
dividend
1+1
Non- Participating Preference Shares
No right to participate, only fixed dividend
Convertible Preference Shares
Can be converted to equity shares at the
of the company
Non- Redeemable Preference Shares
Not paid in cash during the life of the
Redeemable Preference Shares
Such shares are to be redeemed and paid
in cash after a fixed period

8. MERITS
• Fixed dividend
• First claim over assets
• No dilution of control
• No dividend obligation
• Cost of capital is low
• No redemption liability

9. DEMERITS
• Not a high rate of dividend
• No voting rights
• Dividend paid are not tax free
• Non payment of dividend affects the firm

10. QUESTION
• The sunshine co ltd issued 40,000 equity shares of 10 each and 30,000 12% preference
shares of Rs 100 each payable as follows:
All the shares offered were subscribed for by the public and cash was duly received
Journalise.
Equity Shares Preference Shares
On Application 2 20
On allotment 4 35
On first and final call 4 45