Determine the preference shares - equity instruments, Financial Management

Assignment Help:

Determine the Preference Shares - Equity Instruments

Sandwiched between equity share holders anddebt holders, preference share holders have promise of an assured dividend from company and thus presume less risk than that borne by equity share holders. They don't have any voting rights in the company.  When a company fails to pay the dividend to them for two years in a row, then these shares get a voting right.

Preference shares are issued by only those companies who are paying a very low level of tax.  Why? This is because though the returns desired by preference shareholders is at par with the returns offered by fixed deposits, the cost to the company is after tax in case of preference shares while the interest paid on fixed deposits is tax deductible.

So a company that is paying 10 per cent dividend on preference shares ends up paying 1 1 per cent (including 10 per cent dividend tax).  If company pays no income tax [as in the case of a 100 per cent Export Oriented Unit (EOU)] then this is the cost to company.  If company pays tax at the rate of 35 per cent then before tax cost shoots above 14 per cent. Compared with a debt cost of 7 to 12 per cent for established companies, it isn't a viable alternative at all to go in for preference shares if tax liabilities are high. Thus preference shares would only be issued if company requires a more permanent source of capital.

For investor the biggest benefit of investing in a preference share is that dividends are tax free in their hands. Which means if you are getting a dividend of 10 per cent from a preference share and you are in 30 per cent tax bracket, your net return is yet 10 per cent that is equivalent to receiving an interest income of 13 per cent from fixed deposits or any other interest bearing source.

 


Related Discussions:- Determine the preference shares - equity instruments

Determine the revenues earned from overseas markets, a) This refers a busin...

a) This refers a business, such as Palmolive-Colgate being able to sell the same product using the same marketing approach all over the world. It is used by firms with global brand

Calculate the rate of return, A Life Insurance Company invested $10,000,000...

A Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 while the exchange rate was 80 yen per dollar. The insurance company liquidated the investment

Return payment method, when asked to calculate return method given cash flo...

when asked to calculate return method given cash flow before depreciation how do you do it

Illustrate dividend valuation model, Q. Illustrate dividend valuation model...

Q. Illustrate dividend valuation model? The business is being acquired as a going concern and earnings valuations rather than asset valuations are recommended. Even these are b

Show the motives of maintaining receivables, Q. Show the Motives of Maintai...

Q. Show the Motives of Maintaining Receivables? Motives of Maintaining Receivables :- (i) Sales Growth Motives: - The major objectives of credit sales are to increase the to

Market mechanism, Market mechanism: Market mechanism is a term from ec...

Market mechanism: Market mechanism is a term from economics denoting to the use of money exchanged by sellers and buyers with an open and understood system of time and value t

Define long position in future contract and options contract, What is the m...

What is the major difference in the obligation of one with a long position in a futures (or forward) contract in comparison to an options contract? Answer: A futures or forward c

Going concern in financial management, Going Concern in Financial Managemen...

Going Concern in Financial Management Going concern means in which business activities will continue for a fairly long period of time unless and until the business has entered

Define the conversion ratio and conversion value, Define the following term...

Define the following terms that relate to a convertible bond:  conversion ratio, conversion value, and straight bond value. The term conversion ratio is the number of shares of c

Material uses and purchases budget, XYZ company produces three products X,Y...

XYZ company produces three products X,Y and Z. for the coming accounting period budgets are to be prepared based on following information. Budgeted Sales Product X       2,00

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd