Company AccountsQ-2 | Redemption of Preference SharesQuestion 4918 of 112
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Explain the conditions when a company should issue new equity shares for redemption of the preference shares. Also discuss the advantages and disadvantages of redemption of preference shares by issue of equity shares. [CA Inter November 2018, 4 Marks]

Options

A
B
C
D
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Correct Answer

✅ Option — Correct Option

All Options:

  • A
  • B
  • C
  • D

Detailed Solution & Explanation

A company may prefer issue of new equity shares in the following situations: (a) When the company realizes that the capital is needed permanently and it makes more sense to issue Equity Shares in place of Redeemable Preference Shares which carry a fixed rate of dividend. (b) When the balance of profit, which would otherwise be available for dividend, is insufficient. (c) When the liquidity position of the company is not good enough. Advantages of redemption of preference shares by issue of fresh equity shares: (1) No cash outflow of money is required - now or later. (2) New equity shares may be valued at a premium. (3) Shareholders retain their equity interest. Disadvantages of redemption of preference shares by issue of fresh equity shares: (1) There will be dilution of future earnings. (2) Share-holding in the company is changed.

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