2 Cambridge Castings Ltd plans a major expansion to modernise its manufacturing plant, thereby improving productivity and reducing unit costs. The existing capital base is fairly evenly divided between equity and debt, and it is clear that the capital investment programme can only partly be funded through profit retention.

It is suggested that the additional finance could be raised through a preference share issue. You are required to evaluate this source of finance for the company, compared with equity or debt:

(a) from the company’s point of view;

(b) from the viewpoint of investors.