Page 306 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 13: Valuation of Preference Shares

Notes

Value of one equity share of ` 10 paid up = 4,26,500 = ` 14.22
30,000
1
Net assets for the equity shares of ` 5 each = ` 8,53,000 × = ` 2,13,250
4

2,13,250
Value of one equity share of ` 5 paid up = = ` 7.12
30,000

Rs.8,53,000 1
Net Assets for preference shares = × = ` 2,13,250
4
2,13,250
Value of one preference share = = ` 14.22
15,000
Illustration 3 (Valuation of Equity and Preference Shares on the Basis of Rate of Dividend)
The paid up share capital of a company consists of 1,000; 5% preference shares of ` 100 each and
20,000 equity shares of ` 10 each. In addition to a fixed dividend of 5% preference shareholders
are also entitled to participate in profits up to 4% after payment of a dividend of 10% on the
equity shares. Any surplus profits being available to equity shareholders.

The annual average profits of the company are ` 50,000 after providing for depreciation and
taxation and it is considered necessary to transfer ` 3,000 per annum to reserve fund. The normal
return expected on preference shares is 8% and that on equity shares is 10%.

You are required to work out the value of each preference share and equity share in the
company.
Solution

Calculation of Rate of Dividend
`

Average Annual Profits after Tax 50,000
Less: Transfer to Reserve Fund 3,000
Amount Available for Dividend. 47,000
B.F. 47,000
Less: Preference shares’ dividend @ 5% on ` 1,00,000 5,000
42,000

Less: Equity shares’ dividend @ 10% on ` 2,00,000 20,000
22,000
Less: 4% Additional Dividend to Preference Shareholders on ` 1,00,000 4,000
Balance of Profit for Equity shareholders 18,000

Thus total of Preference Shares Dividend rate 5% + 4% = 9%

18,000
Rate of Dividend on equity shares = 10% + = × 100
2,00,000
= 10% + 9% = 19%

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