Demerits of Preference Share
The demerits of raising funds through preference shares are:
1. Limites Appeal: Preference shares are not suitable for investors who are willing to take risks in exchange for higher returns.
2. Dilutes Claim of Equity Shareholders: Preference capital dilutes equity shareholders’ claims towards the company’s assets.
3. Unreliable and Low Returns: As the dividend on these shares is only paid when the company makes a profit, there is no guaranteed return for investors. As a result, these shares may not be very appealing to investors.
4. No Tax Benefits: The dividend is not deductible as an expense from profits. As a result, there is no tax savings, as in the case of interest on loans.
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