Answer:
Valuation
of Shares
A
company’s shares can be categorised into:
- Ordinary or equity shares
- Preference shares
The
returns the shareholders receive in return are called dividends. Preference
shareholders get a preferential treatment as to the payment of dividend and
repayment of capital in the event of winding up. Such holders are eligible for
a fixed rate of dividends. The following are some important features of
preference and equity shares:
- Dividends – Rate is fixed for preference shareholders. They can be given cumulative rights, that is, the dividend can be paid off after accumulation. The dividend rate is not fixed for equity shareholders.
- Claims – In the event of the business closing down, the preference shareholders have a prior claim on the assets of the company. Their claims shall be settled first and the balance, if any, will be paid off to equity shareholders.
- Redemption – Preference shares have a maturity date on which the company pays off the face value of the shares to the holders. Preference shares can be of two types – redeemable and irredeemable.
- Conversion – A company can issue convertible preference shares. After a particular period, as mentioned in the share certificate, the preference shares can be converted into ordinary shares.