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CA Intermediate · Financial Management and Strategic Management · Types of Financing

Which of the following is a source of long-term finance that is classified as a hybrid security because it carries a fixed dividend like debt but ranks as part of share capital?

Preference share capital is the hybrid security. It pays a fixed rate of dividend, similar to interest on debt, yet it forms part of share capital and its dividend is payable only from distributable profits. Equity has no fixed return, and commercial paper and trade credit are short-term sources.

  1. AEquity share capital
  2. BPreference share capitalCorrect
  3. CCommercial paper
  4. DTrade credit

Explanation

Preference shares carry a fixed rate of dividend, like the interest on debt, but are part of share capital and dividend is paid only out of profits. Equity shares have no fixed return. Commercial paper and trade credit are short-term sources.

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