The correct answer is: C. Both A and B.
Preference shares can be reduced out of profits available for dividend and proceeds of a fresh issue of shares.
Preference shares are a type of share that entitles the holder to a fixed dividend, which is paid before any dividends are paid to ordinary shareholders. Preference shares can be redeemed, which means that the company can buy them back from the shareholders, at any time. If a company decides to redeem its preference shares, it can do so out of profits available for dividend or out of the proceeds of a fresh issue of shares.
If a company redeems its preference shares out of profits available for dividend, then it will need to have sufficient profits to cover the cost of the redemption. If a company redeems its preference shares out of the proceeds of a fresh issue of shares, then it will need to raise the necessary funds through a new share issue.
There are a number of reasons why a company might choose to redeem its preference shares. For example, the company may want to reduce its debt levels or it may want to simplify its capital structure. Whatever the reason, the decision to redeem preference shares is a complex one that should be made with careful consideration.
Here is a brief explanation of each option:
- A. Profits available for dividend: This is the amount of profit that a company has available to pay out as dividends. It is calculated by taking the company’s net profit after tax and deducting any dividends that have already been paid.
- B. Proceeds of a fresh issue of shares: This is the amount of money that a company raises when it issues new shares. The proceeds of a fresh issue of shares can be used to repay debt, invest in new projects, or simply to increase the company’s cash reserves.
- C. Both A and B: This is the correct answer. Preference shares can be reduced out of profits available for dividend and proceeds of a fresh issue of shares.
- D. Capital profits: This is incorrect. Capital profits are profits that are made from the sale of assets, such as land or buildings. Capital profits are not available to be used to reduce preference shares.