A preference share is a hybrid security, It combines some of the characteristics of debt and some of the equity. It represents a position of the ownership of the capital stock or equity interest.
The terminology of preference share
Dividend-Preference share has dividend provision which is either cumulative or non-cumulative. Cumulative provision of dividend which means any dividend not paid by the company accumulates. The firm must pay these cumulative dividends prior to the payment of the common stock dividend.
An investor contemplating the purchase of preference shares with a non-cumulative dividend. Provision needs to be especially diligent in the investigation of the company because of the investor’s potentially weak position.
Participating preference share-Preference shares mostly non-participating. The preference shareholder receives only the stated dividend. It has surrendered claim to the residual earnings of his company in return for the right to receives his dividend. Dividends paid to common shareholders.
Voting rights-Preference shares do not normally confer voting rights preference shareholders. Not allowing to vote is that they are in a relatively secure position. They should not right to vote to expect in the special circumstances.
Convertible-Convertible means that the owner has the right to exchange a preference share for a share of the equity. The holder of convertible preference share usually has a stronger claim .the holder of an equity share to earnings and assets.
A company earnings increase, the convertible preference share will rise in value. The company might call preference share, the preference shareholder given the required number of days notice this will enable him to either convert into equity or sell the stock.
Par value- Most of the preference share has a par value at the dividend right. A call price usually stated in terms of the par value.
Sinking fund retirment-Preference share are often a certain percentage of earnings allocated for redemption each year. Sinking fund share called a lot or purchased in the open market.The owner of preference share called for sinking fund purposes must seek alternative investment.Sinking fund requirements reduce preference share outstanding which will give the remaining shares a strong income position.
Features of preference share
The following are the features.
->Claims-Preference shareholders have a claim on assets and income prior to ordinary shareholders. Equity shareholders have a residual claim on a company’s income and assets. They are the legal owners of the company.
->Dividend-The dividends rate is fixed in the case of preference share. It may be issued with cumulative rights. In the case of equity shares neither the dividend rate known nor does dividend accumulate. Dividends paid on preference and equity shares are not taxed deductible.
->Redemption- Both redeemable and irredeemable preference shares have a maturity date while irredeemable preference shares are perpetual equity shares have no maturity to date.
->Conversion- A company can issue convertible preference shares. That is after a stated period. Such shares converted into ordinary shares.
Valuation of preference share
A company may issue two types of shares.
Preference shares have preference cover ordinary shares in terms of payment of dividend and repayment of capital. If the company is wound up. They issued with or without a maturity period.
Redeemable preference shares with maturity. Irredeemable preference shares are shares with maturity.
Irredeemable preference shares are shares without any maturity. The holders of preference shares get dividends at a fixed rate with regards to dividends. Preference shares get dividends at fixed rate with regard to dividends. It issued with or without cumulative features.
In the use of cumulative preference shares, unpaid dividends accumulate and are payable in the future. Dividends in arrears accumulate in the case of non-cumulative preference shares.