ACCA Financial Management (F9) Certification Practice Exam

What does a preference share grant to its holders compared to ordinary shareholders?

1. More voting rights

2. Priority for receiving dividends

3. Higher share value during liquidation

4. Ability to convert into ordinary shares

The correct answer is: Priority for receiving dividends

Preference shares grant their holders priority for receiving dividends compared to ordinary shareholders. This means that preference shareholders are entitled to receive dividends before any dividends are paid to ordinary shareholders. The preference share structure typically includes a fixed dividend rate, which ensures that these shareholders have a more predictable income stream. This priority can be particularly advantageous during times when the company may not be able to pay all its dividends due to financial difficulties. In such circumstances, the holders of preference shares will receive their dividends before ordinary shareholders and may even receive dividends in preference to ordinary shares in case the company pays dividends only intermittently. Ordinary shareholders, on the other hand, may receive dividends only after all obligations to preference shareholders have been fulfilled, and they do not have any guaranteed dividend payout. This differentiation in dividend distribution is a key characteristic that distinguishes preference shareholders from ordinary shareholders.