The correct answer is: A. Increases OL
Preference shares are a type of equity share that gives the holder a preference over ordinary shareholders in terms of dividends and capital repayment. This means that preference shareholders must be paid a dividend before ordinary shareholders, and they must also be repaid their capital before ordinary shareholders if the company is liquidated.
As a result of these preferences, preference shares are considered to be a more senior form of debt than ordinary shares. This means that they are included in the company’s operating liabilities (OL), which are the debts that the company must repay within the normal operating cycle.
Ordinary shares, on the other hand, are considered to be a more junior form of debt. This means that they are not included in the company’s OL, but are instead included in its financial liabilities (FL).
Therefore, the use of preference share capital in a company’s capital structure will increase its OL.
Here is a brief explanation of each option:
- A. Increases OL. As explained above, preference shares are considered to be a more senior form of debt than ordinary shares. This means that they are included in the company’s OL, which are the debts that the company must repay within the normal operating cycle.
- B. Increases FL. Ordinary shares, on the other hand, are considered to be a more junior form of debt. This means that they are not included in the company’s OL, but are instead included in its FL.
- C. Decreases OL. This is not correct, as preference shares are included in OL.
- D. Decreases FL. This is not correct, as ordinary shares are not included in FL.