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Difficulty: HardPublic Limited Companies: Characteristics, Stock Listing, and Securities

An investor analyzing capital securities of a listed public limited company seeks an instrument that yields a fixed dividend rate and grants priority in asset distribution upon liquidation, but carries no voting rights at the annual general meeting. Which security matches this investor's requirement?

  1. Preference sharesAnswer
  2. B
    Debentures
  3. C
    Treasury bills
  4. D
    Ordinary shares

Answer

Preference shares provide a fixed rate of dividend and priority claims on remaining assets upon liquidation ahead of ordinary shares, but generally do not grant voting rights.
Preference shares represent ownership capital in a public limited company that entitles holders to a fixed dividend payout prior to ordinary share dividend declarations. In the event of liquidation, preference shareholders are repaid before ordinary shareholders, but standard preference shares do not carry voting privileges.

Step-by-Step Solution

1
Identify key characteristics specified in the stem
The instrument yields a fixed dividend rate, has priority claim on assets during liquidation, and lacks voting rights.
Analyzing corporate security features isolates equity options from debt or money market instruments.
2
Distinguish between dividends and interest
The instrument pays a dividend (share capital), eliminating debt securities like debentures which pay interest.
Debentures represent loan capital where holders are creditors receiving fixed interest payments regardless of profit.
3
Evaluate share classes in a public limited company
Preference shares fit the profile of fixed dividend entitlement and priority over ordinary shares without voting power.
Ordinary shareholders hold full voting rights and variable residual dividends, whereas preference shareholders gain dividend priority in exchange for voting rights.

Key Concept

Classification and features of corporate securities in Public Limited Companies
Estimated Time:1m 30s
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Topics

Public Limited Companies: Characteristics, Stock Listing, and Securities

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