Question : Case Study: XYZ Ltd. - Raising Finance for Expansion
XYZ Ltd. is a growing company that manufactures electronic gadgets. The company has been successful in the market and is planning to expand its operations. To finance this expansion, XYZ Ltd. is considering various sources of business finance.
Questions : Equity Shares and Preference Shares
If XYZ Ltd. issues cumulative preference shares, it means that:
Option 1: The shares cannot be redeemed
Option 2: Dividends on these shares must be paid before any arrears
Option 3: These shares cannot be traded in the stock market
Option 4: The company is required to pay dividends at a fixed rate
Correct Answer:
Dividends on these shares must be paid before any arrears
Solution : The correct answer is (b) Dividends on these shares must be paid before any arrears
Cumulative preference shares entitle the shareholders to receive their fixed dividends before any dividends are paid to equity shareholders. If the company is unable to pay dividends in a particular year, the unpaid dividends accumulate and must be paid in future years before any dividends are distributed to equity shareholders. This ensures that the preference shareholders receive their dividends, including any unpaid amounts from previous years, before equity shareholders receive any dividends.
