Question

Name the hybrid security that carries a fixed rate of dividend and is a source of long-term finance for a company. Explain any four types of such security.

Hint:

Preference shares provide a fixed return like debt but give shareholders certain equity-like benefits such as the possibility of conversion or participation in profit-sharing.

Answer 1

The hybrid security that carries a fixed rate of dividend and serves as a source of long-term finance is called
Preference Share Capital or simply
Preference Shares. These shares offer a fixed dividend and are a combination of both debt and equity, making them a hybrid security.
Four types of preference shares:

• 
  Cumulative Preference Shares: These shares entitle the shareholder to accumulate unpaid dividends from previous years, which must be paid before any dividends are paid to common shareholders.
• 
  Non-cumulative Preference Shares: Unlike cumulative preference shares, these shares do not allow shareholders to accumulate unpaid dividends. If a dividend is not declared in a particular year, the shareholder forfeits that dividend.
• 
  Participating Preference Shares: These shares allow shareholders to receive additional dividends beyond the fixed rate, based on the company’s profits, after paying dividends to common shareholders.
• 
  Convertible Preference Shares: These shares can be converted into common shares after a certain period or at the discretion of the shareholder, giving them the option to benefit from future capital appreciation.