Classification of preference share capital, Finance Basics

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Classification of Preference Share Capital

i) Redeemable Class

Redeemable preferential shares are bought back via Issue Company after minimum redemption duration however before expiring of maximum redemption time after that they become creditors.

ii) Irredeemable Preference Shares

Are perpetual preference shares like they will not be redeemed in the company's duration unless it is within liquidation, it is permanent.

iii) Non-Participative Preference Shares

These do not claim any money above and over their par value, although are generally redeemable and cumulative.

iv) Cumulative Preference Shares

These can claim arrears as an example whether a company sold 10% Shs.20 preference shares and did not pay dividends for the after that two years, so in the third year shareholders will claim as:

10% x 20 x 3yrs   = Shs 6 less withholding tax:

                            = Shs 6 less 5% of Shs 0.30

                            = Shs 5.70 net

v)  Non-Cumulative Preference Shares

These cannot claim interest in arrears.

vi) Convertible

These can be converted in ordinary shares as that is optional.

Conversion ratio = par value of ordinary share/par value of preference shares as example of whereas par value of ordinary shares is Sh.10 and that of preference shares is Sh.20, then conversion ratio = 10/20=1/2 that is for every preference share you get 2 ordinary shares.

Conversion price par value of preference shares per no. of ordinary shares to be obtained.

20/2=shs10

vii) Non-Convertible Preference Shares

These cannot be transformed into ordinary shares.


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