Thursday, October 29, 2009


Valuation of Preference Shares

A company may issue two types of shares,
  • Preference shares.
  • Ordinary shares.
Preference shares have preference over ordinary shares in terms of payment of dividend and repayment of capital.
They may be issued with or without a maturity period.

  • Redeemable preference shares with maturity.
  • Irredeemable preference shares are shares without any maturity.
  • Cumulative preference shares unpaid dividends accumulate and are payable in the future.
  • Not cumulative shares do not accumulate dividends.
Features of Preference and Ordinary Shares
Following are the features preference shares,

  • Preference shareholders have claim on assets and income prior to ordinary shares.
  • The dividend rate is fixed in case of Preference shares.
  • A company can issue convertible Preference shares.
  • Both redeemable and irredeemable Preference shares can be issued.

We can value Preference shares like below
Po = PDIV {(1/kp) – [1/kp (1+kp)n]} + Pn / (1+Kp)n
Valuation of irredeemable preference shares
Po = PDIV / Kp
Yield on Preference shares
Kp = PDIV / Kp

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