Mention any two similarities and two dissimilarities between Debt Capital and Preference Share Capital.
Answer – Both debt and preference capital normally carry a stated rate of return and ordinarily do not give the same voting control as equity. Their legal positions differ.
Basis | Debt | Preference capital |
Status | Borrowed capital; holders are creditors. | Share capital; holders are shareholders. |
Return | Interest is a contractual obligation. | Preference dividend is governed by company law and issue terms. |
Tax treatment for company | Interest is generally deductible subject to law. | Dividend is not an operating expense deduction. |
Priority | Creditors rank before shareholders on liquidation. | Preference holders rank before equity, but after creditors. |
These differences affect risk, cost and the financing decision.