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      Question

      Preference shares are a hybrid form of corporate

      financing that carry features of both equity and debt. Which of the following is a correct statement about preference shares?
      A Preference shareholders have voting rights at all general meetings on all resolutions Correct Answer Incorrect Answer
      B Preference shareholders receive dividends before equity shareholders, and in the event of winding up, they have priority over equity shareholders in repayment of capital Correct Answer Incorrect Answer
      C Preference shares carry the highest risk among all forms of corporate capital Correct Answer Incorrect Answer
      D Dividends on preference shares are tax-deductible expenses for the company, similar to interest on debt Correct Answer Incorrect Answer
      E Convertible preference shares cannot be converted into equity shares once issued, as this would change the company's capital structure Correct Answer Incorrect Answer

      Solution

      Preference shares are a class of shares that carry a preferential right over equity shares in two key ways: (1) they receive dividends at a fixed rate before any dividend is paid to equity shareholders; and (2) in the event of company winding up (liquidation), preference shareholders are repaid their capital before equity shareholders receive anything. Preference shareholders generally do not have voting rights except on matters directly affecting their interests as preference shareholders. Dividends on preference shares are not tax-deductible (unlike interest on debt), making them more expensive for the company on an after-tax basis. Convertible preference shares can be converted into equity shares at a specified ratio and time.

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