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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


Team Careers360 16th Jan, 2024
Answer (1)
Team Careers360 17th Jan, 2024

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.

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