Answer Posted / shaikmohaideen mba
Raising capital by issue of shares is a most important method of raising long-term funds. Those funds can be invested in long-term or permanent assets like land and building, plant and machinery, furniture etc. A share is unit of measure of a shareholder's interest in the total capital of the company. Share capital of a company is divided into a large number of equal parts and each part is known is a share. According to Companies Act, a company can issue two types of shares -preference and equity. Preference shares. Sec. 85(1) of the Companies Act defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. Thus, both the preferential rights viz. (a) preference in payment of dividend and (b) preference in repayment of capital in case of winding up of the company, must attach to preference shares. The rate of dividend on these shares is fixed and the dividend on these shares must be paid before any dividend is paid to ordinary shares. Directors, however, may decide not to pay any dividend to any class of shareholders even if there are sufficient profits. But, if any how, they decide to pay the dividend, preference shareholders will get the priority to pay the ordinary shareholders.
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