Page 297 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes Thus, this aspect becomes important in two circumstances:
(i) When the date of redemption is not very far; and

(ii) When the shareholders are also entitled to receive a premium on redemption.

Notes If there are restrictions on the quantum of such additional dividends, then the
rate of capitalisation will be somewhere between the rate of capitalisation for the fixed
dividend and that for equity shares, depending upon the exact terms of issue.

In case the date of redemption is not very far, it would be appropriate to estimate all future
receipts in respect of dividends as well as capital and to reduce them to their present worth.
In case of premium too the best way is to determine its present worth.
(d) Preference shares may also carry a right to share in the residual value in the event of
winding up. In such cases, a definite value may be placed for this right only when it is
known that the winding up is imminent.

(e) Preference shares may have a right of conversion into equity shares. The additional value
to be placed on such preference shares will depend upon the exact terms of the right to
convert. The price at which conversion can be effected is also relevant. The price of a
preference share will in such a case vary, as the price of an equity share rises above the
option price.
(f) In certain circumstances, preference shares also carry voting rights. In case of private
companies which are not subsidiaries of public companies there is no legal provision to
regulate such rights; they depend on the Memorandum and Articles of Association of the
company concerned. In case of public companies and their private subsidiaries, preference
shareholders have voting rights in respect of resolutions that directly affect their rights and
also in respect of resolution when dividends on such shares remains unpaid for certain
periods as specified in law. Preference shares currently carrying unrestricted voting rights
become very important in situations where the control of a company is sought to be
transferred.

Any additional value in respect of this right should, however, be considered after taking
into consideration the circumstances of each individual company.
Problems can arise in the valuation of preference shares with substantial arrears of
cumulative dividends. If a company has reached a profit earning stage, the value of the
arrears of dividend should be added to the value of the Share.

Notes In certain circumstances, preference shares also carry voting rights.

Apart from the special considerations mentioned above, the value of a preference share is equal
to the value arrived at by dividing the actual rate of dividend by the normal expected rate of
capitalisation.

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