PRESENTATION ON FINACIAL MANAGEMENT

PREFERENCE SHARES

MEMBERS

Nisha Sehrawat Komal Priya Rashi Agarwal Divya Lohia Parthvi Upadhaya Pooja Tulsyan Priyanka Chandani Dubey Rashmi Dubey Shilpi Kumari

CONCEPT Preference shares are those shares to

which some preference is attached in terms of:

(a)payment of dividend (b)Return of capital (c)both. Preference shares (prefs) are legally

shares, but they are very different from ordinary shares.

CONT………

Dividends on preference shares have to be paid before dividends on ordinary shares.

Dividends on ordinary shares may not be paid unless the fixed dividends on preference shares is paid first.

Dividends are fixed like bond coupons, although there are usually provisions to not pay, or delay payments.

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shareholders, although a lower priority than debt holders.

In the case of cumulative prefs, if the dividend is not paid in full, the unpaid amount is added to the next dividend due.

Preference dividends are fixed, so they do not participate in increases (or decreases) in profits as ordinary shareholders do.

WHY DIVIDEND IS PAID ?

Dividends are very important to the investor. Every young investment student learns of the "greater fool theory" when their professor or mentor asks whether dividends are important. If the answer is "not really, if the share price increases", the professor then goes on to explain that without eventual dividends to the investor, the share is worthless. Consider, in the extreme, the purchase of a share that guaranteed not to pay any dividends or other payouts to the holder. What would be the worth of this share to the holder? Simply, it would be a "promise not to pay". Ever. The holder might get some psychographic thrill from saying they owned the share, but they would in reality have the same claim to its assets and cashflows as anyone else. Their claim would be worthless, except if they sold it to someone who hadn't figured this out. Hence the "greater fool theory".

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PREFERENCIAL RIGHTS The Shareholders, which hold the preference

non-documentary registered shares with the fixed rate of dividend, shall reserve the following rights:

to vote in the General Meeting of Shareholders of the Bank for resolution on the matters of reorganisation and liquidation of the Bank;

to vote for resolution on the matters of making any amendments and additions to the Articles of Association of the Bank, which may restrict the rights of the Shareholders, which hold the preference shares of the said type;

CONT…….. to vote on all the matters within the

competence of the General Meeting of Shareholders of the Bank.

to receive the fixed dividend at the rate of 20 per cent per annum of the nominal value of shares.

COST OF PREFERECIAL SHARES

Preference shares can be divided into:

Irredeemable preference shares

Redeemable preference shares

CONT…….. (1) Cost of Irredeemable preference

shares

Irredeemable preference shares are those shares issuing by which the company has no obligation to pay back the principal amount of the shares during its lifetime. The only liability of the company is to pay the annual dividends. The cost of irredeemable preference shares is:

Kp (cost of pref. share) = Annual dividend of preference shares / Market price of the preference stock

Example: Let us calculate the cost of 10% preference capital of 10,000 preference shares whose face value is $100. The market price of the share is currently $115.

Annual dividend = 10% of $100 = $10 per share

Kp = $10/$115 = 8.7%

CONT…… (2) Cost of Redeemable preference shares

Redeemable preference shares are those shares which have a fixed maturity date at which they would be redeemed.

Cost of Redeemable preference shares = Annual Dividend +(Redeemable Value - Sale value) / Number of years for redemption

(Redeemable Value + Sale value) / 2

Or

Kp = D +(RV - SV) / N

(RV + SV) / 2

Example: A company issues 10000, 8% preference shares of $100 each redeemable after 20 years at face value. The floatation costs are $3 per share.

Redeemable value = $100;

Sale value = $100-$3 = $97

Annual dividend = $8 per share.

Kp = 8 + (100 - 97) / 20 = 8.27%

(100 + 97) / 2

WHAT IS A YIELD ? Yield refers to the interest and dividend

income earned on a fund. It is based on the income over a certain period (such as seven days or 30 days) and on the assumption that income will continue to be earned at the same rate. It is expressed as an annualized number, representing a full year's income. Return, sometimes referred to as "total return," combines the interest and dividends paid and the change in share price to tell you what an investor's money actually earned during a specific period in the past.

TYPES OF YIELD Nominal Yield - Also known as the 'coupon rate,' it is the indicated

rate of interest on the bond.

- The annual interest is calculated on the par value of the bond at the coupon rate.

- It is immaterial whether you purchased the bond at premium (more than par value) or at a discount (less than par value)

- The nominal yield always concerns with the par value.

For instance, 7% $250 Notes imply that 7% coupon rate is payable on $250, even if you bought the Notes at, say, $280.

CONT……. Current Yield- Current yield is the current percentage return on the

security. - It assumes the holder will keep the security only over the

next one year and during that period there will be no change in its market price. In effect, it does not refer to the 'total yield' up to the time of maturity.

- It also eliminates the assumption of reinvesting the periodic receipts at a constant rate.

- - It can be represented in the form of a form of a formula, as

below:

Current Yield = Nominal Yield/Market Price

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Difference between yield and

return Yield -> Yield refers to the interest and

dividend income earned on a fund. It is based on the income over a certain period (such as seven days or 30 days) and on the assumption that income will continue to be earned at the same rate. It is expressed as an annualized number,representing a full year's income. Return, sometimes referred

CONT…….

of as "total return," combines the interest and dividends paid and the change in share price to tell you what an investor's money actually earned during a specific period in the past.

Return -> Total return includes dividends

and capital gains that the fund distributes to shareholders. A mutual fund incurs capital gains when it sells some of its portfolio holdings to lock in profits or redeem fund shares.

CONT………..

  Return, also referred to as "total return",

expresses what an investor has actually earned on an investment during a certain time period in the past. It includes interest, dividends and capital gain (such as an increase in the share price).