Theory question 103
Company Accounts3. (a) What is a preference share? (b) Differentiate between the following classes of preference shares: (i) Participative and non-participative (ii) Cumulative and non-cumulative (iii) Redeemable and irredeemable.
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(a) A preference share is a share that carries a fixed rate of dividend paid before any ordinary dividend, and usually has priority over ordinary shares for repayment of capital on winding up.
(b)(i) Participating preference shares receive their fixed dividend and also share in remaining profits with ordinary shareholders; non-participating shares receive only the fixed dividend.
(ii) Cumulative preference shares carry forward any unpaid dividend to be paid in later years before ordinary dividends; with non-cumulative shares a dividend missed in a year is lost.
(iii) Redeemable preference shares can be bought back (repaid) by the company at a stated time or option; irredeemable shares are repaid only when the company is wound up.
For each pair, say what the holder gets in one case and does not get in the other.