Preference shareholders are concerned with the maintenance of profits
worth a view to ensuring regular payment of the fixed dividends rather than
with the value assets. The question of capital repayment on liquidation is
usually deemed to be of secondary importance to dividend maintenance.
worth a view to ensuring regular payment of the fixed dividends rather than
with the value assets. The question of capital repayment on liquidation is
usually deemed to be of secondary importance to dividend maintenance.
Similarly to preference shareholders, ordinary Shareholders are not
greatly concerned with the actual value of assets but are interested primarily
in dividend possibilities. As regards possibilities, ordinary shareholders may
be divided into two classes: –
greatly concerned with the actual value of assets but are interested primarily
in dividend possibilities. As regards possibilities, ordinary shareholders may
be divided into two classes: –
(a) Those that are to receive
the largest possible dividends and to let the future look after itself, these
shareholders usually criticize a too prudent policy which seems to them to
benefit the preference shareholders (by making possible the payment of
preference dividends out of reserves in years when trading losses are incurred
much more than themselves.
the largest possible dividends and to let the future look after itself, these
shareholders usually criticize a too prudent policy which seems to them to
benefit the preference shareholders (by making possible the payment of
preference dividends out of reserves in years when trading losses are incurred
much more than themselves.
(b) Those who take longer view
that the setting aside of ample reserves is of the greatest benefit to the
company as a whole and thus, ultimately, to themselves.
that the setting aside of ample reserves is of the greatest benefit to the
company as a whole and thus, ultimately, to themselves.
The examination of the accounts from the point of view of a shareholder
or prospective shareholder raises questions of share valuation.
or prospective shareholder raises questions of share valuation.
Two methods of computing the value of shares are commonly employed:
(1) The yield or profit basis
Where this basis is employed it is first necessary to determine the rate
of interest which an investor would consider to be a seasonal yield on an investment
in a share of the class concerned. This rate be based on the current rate of
interest on gilt-edged securities as increased to compensate for the degree of
risk involved and adjusted in view of the class of share concerned; or
alternatively the current return on investments in other business of the same
types and size, and in which the risks are similar, may be taken as a basis and
adjusted for any special circumstances.
of interest which an investor would consider to be a seasonal yield on an investment
in a share of the class concerned. This rate be based on the current rate of
interest on gilt-edged securities as increased to compensate for the degree of
risk involved and adjusted in view of the class of share concerned; or
alternatively the current return on investments in other business of the same
types and size, and in which the risks are similar, may be taken as a basis and
adjusted for any special circumstances.
Where preference shares are being valued, it is generally necessary
merely to compare the fixed dividend there on with the current yield to compare
the fixed dividend there on with the current yield rate.
merely to compare the fixed dividend there on with the current yield to compare
the fixed dividend there on with the current yield rate.
In the case of ordinary shares, however, it is necessary to estimate the
future maintainable annual profits which will be available for distribution to
the ordinary shareholders after the payment of preference dividends; these
profits will then be capitalized by computing the capital sum interest on which
at the ascertained yield rate will be equal to the net annual profit.
future maintainable annual profits which will be available for distribution to
the ordinary shareholders after the payment of preference dividends; these
profits will then be capitalized by computing the capital sum interest on which
at the ascertained yield rate will be equal to the net annual profit.
This capital sum represents the total value basis is adopted the super
profits resulting from good – will are included in the estimated annual
profits, and thus he capital value of super profits) and consequently no
further adjustment for goodwill is necessary.
profits resulting from good – will are included in the estimated annual
profits, and thus he capital value of super profits) and consequently no
further adjustment for goodwill is necessary.
(2) The assets or equity basis
Generally this basis can be employed only in connection with ordinary
shares (unless the preferences shares have a right to participate equally with
the ordinary shares in any surplus assets on liquidation and are not
preferential as to capital, but this is not usually the case).
shares (unless the preferences shares have a right to participate equally with
the ordinary shares in any surplus assets on liquidation and are not
preferential as to capital, but this is not usually the case).
All the assets, including goodwill, must be valued and totaled, and from
this total are deducted the liabilities to creditors, debenture-holders and
other non-shareholders, thus giving the total net assets. The value of the preference
share capital is then deducted to give the net assets available for the
ordinary shares, and for this purpose it is considered that the value of the
preference share capital is to be taken at the amount repayable in a
winding-up, although some authorities consider that when winding-up is not
contemplated the value on yield basis should be taken.
this total are deducted the liabilities to creditors, debenture-holders and
other non-shareholders, thus giving the total net assets. The value of the preference
share capital is then deducted to give the net assets available for the
ordinary shares, and for this purpose it is considered that the value of the
preference share capital is to be taken at the amount repayable in a
winding-up, although some authorities consider that when winding-up is not
contemplated the value on yield basis should be taken.
REQUIRED: Determine the value of each
share using the two main methods of valuing shares.
share using the two main methods of valuing shares.
