Types of Preference Shares
- Participating Preference Shares: Entitles holders to dividends at a fixed rate and allows them to participate in extra profits.
- Non-Participating Preference Shares: Provides fixed dividends without any right to participate in additional profits.
- Cumulative Preference Shares: Accumulates unpaid dividends which must be paid out before any dividends to equity shareholders.
- Non-Cumulative Preference Shares: Does not accumulate unpaid dividends.
Definition
A Non-Participating Preference Share is a preference share that entitles its holder to a fixed dividend but does not grant the right to participate in any additional profits or surplus earnings of the company beyond this fixed rate.
The value of a non-participating preference share can be calculated using the Dividend Discount Model (DDM):
$$ \text{Price} = \frac{\text{Dividend}}{\text{Discount Rate}} $$
Where:
- Dividend is the fixed dividend.
- Discount Rate is the required rate of return.
Importance
Non-participating preference shares are crucial in balancing the company’s capital structure. They attract investors looking for steady income with less risk compared to equity shares.
- Equity Share: A share representing ownership in a company, entitling the holder to a part of the company’s profits.
- Dividend: A payment made by a company to its shareholders, usually as a distribution of profits.
- Fixed Rate Dividend: A dividend rate that does not change over the lifespan of the share.