4.4 VALUATION OF PREFERENCE SHARES
The technique of valuing preference shares is not different from the valuation of bonds. Dividends are discounted by the required rate of return. The required rate of return is composed of the risk-free rate and a premium for risk. However, it may be noted that the risk premium in this case is greater than that in case of bonds, although less than that in case of equity shares. It is because dividend on preference shares is fixed, moreover, preference shareholders have a prior claim on both the income and assets of the firm vis-a-vis the equity shareholders, however this is subject to satisfaction of the claim of the debenture holders. The value of preference shares with a definite maturity can be expressed ...
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