Page 309 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes z z One limitation of the intrinsic value formula of valuation of preference shares is that you
cannot have a growth rate that exceeds the discount rate or your calculator will return an
error or indicate infinity.

13.4 Keywords

Annual Preferred Dividend: The annual preferred dividend is determined by multiplying the
preferred dividend rate times the par value of the preferred stock.
Bond: A bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt
security, under which the issuer owes the holders a debt and, depending on the terms of the
bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date,
termed the maturity.

Common Stock: Common stock is a form of corporate equity ownership, a type of security.
Dividends: Dividends are payments made by a corporation to its shareholder members. It is the
portion of corporate profits paid out to stockholders.
Liquidation: Liquidation is the process by which a company (or part of a company) is brought to
an end, and the assets and property of the company redistributed.
Par Value: The par value represents the claim of the preferred stockholder against the value of
the firm.
Preferred Dividend/Preferred Dividend Rate: The preferred dividend rate is expressed as a
percentage of the par value of the preferred stock.

Preferred Stock: Preferred stock (also called preferred shares, preference shares or simply
preferred) is an equity security with properties of both equity and a debt instrument, and is
generally considered a hybrid instrument.

13.5 Review Questions

1. Discuss the concept of valuation of shares.
2. What are the SEBI guidelines in relation with valuation of preference shares?
3. 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% the
preference shareholders are also entitled to participate in the profits upto 5% 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 the Reserve
Fund. The annual 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 and Equity share in the
company.

Balance Sheet of Good Enterprise Ltd. as on 31 December, 2010 is as under:
st
Liabilities ` Assets `
Equity Share Capital of ` 10 2,00,000 Goodwill 50,000
Equity Share Capital of ` 4 1,00,000 Fixed Assets 1,10,000
General Reserve 30,000 Stock 1,20,000

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