(88)---VALUATION OF PREFERENCE SHARES

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