Page 307 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes Normal Rate of Return: On Equity shares – 10%
On Preference shares – 8%

Value of Share = Rateof Dividend × PaidupValueof Shares
NormalRate

19
Value of Equity share = × 10 = ` 19
10
9
Value of Preference share = ×100 = ` 112.50
8



Case Study Network18 Preference Shares - Amazing Return, Amazing
Risk!
etwork18 Media and Investments Ltd is in the business of forming and selling
subsidiaries, getting into joint ventures and raising finance. Its broadly a media
Ncompany.
In March 2008, the company came out with a rights issue consisting of equity and preference
shares. The preference shares of the company are listed on BSE (scrip code 700132) and
NSE.
The Opportunity
• The preference shares have a face value of ` 150 and are to be redeemed at par in May
2013.
• The preference shares have a 5% dividend payout, which is cumulative.
• Till today, the company has not paid any dividend on the preference shares and it is
fair to assume that the entire chunk will be paid along with the principal at the time
of redemption.
• So, at the time of redemption, a person holding the preference shares should get
` 150 (principal) and ` 37.5 (accumulated dividend @ 5% p.a. for 5 years). Thats a
total of ` 187.5/-.
• The preference shares are presently trading at ` 105/-.
• So if one buys it at present at ` 105, then one would get ` 187.5 in May 2013.

• That’s a return of 79% in 20 months! Super cool!
The Problems
Nothing is for free and same is the case here. Lets just take a look at the risks and the
problems.
• Network18 is not exactly a conservative investor’s dream. The business is damn
difficult to understand, given the fact that it changes all the time due to frequent
M&A activities. The profitability has been erratic, with the company making profits
just once in the last 5 years. More importantly, cash-flows have been really pathetic,
with the company reporting a negative cash flow from operations of ` 306 cr in
FY11.
• The company has ` 1775 cr of debt but it has about ` 350 cr of liquid investments
too. Contd...

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