Debt finance is a fixed return finance as the cost (interest) is fixed on the par value (face value of debt). It is ideal to use if there’s a strong equity base. It is raised from external sources to qualifying companies and is available in limited quantities.
Preference Share Capital (Quasi-Equity)
It is also called quasi-equity because it combines features of equity and those of debt. It is preference because it is preferred to ordinary share capital
Similarities between Debt and Preference Share Capital
- Both have fixed returns.
- Both will increase the company’s gearing ratio.
- Both are usually redeemable.
- Both do not have voting rights.
- Both may force the company into receivership
- Both have superior claims over and above owners.
- Both are external finances.
- There is no growth with time.
Differences between Preference Share Capital and Debt
DEBT
- Interest is tax allowable
- Interest is a legal obligation
- Debt finance is always secured
- Debt finance is a pre-conditional
- Has a superior claim
PREFERENCE SHARE CAPITAL
- Dividends are not tax allowable
- Dividends are not a legal obligation
- Preference is not secured finance
- Is not conditional finance
- Has a residue claim (after debt)
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