Skip to main content

Preference share

A preference share combines equity legal form with a fixed, typically cumulative dividend ranking ahead of ordinary dividends but behind debt in liquidation.

ByHoang TruongUpdated

See it move

Loading infographic...

A preference share paying a fixed €3 annual dividend, with investors requiring a 6% return, is priced as a perpetuity at €3 ÷ 0.06 = €50. If market rates rise to 8%, the same dividend is worth only €3 ÷ 0.08 = €37.50 — the same inverse relationship between yield and price seen in fixed-rate bonds.

Where it fits
SubjectCorporate FinanceCoreTopicBond & Equity ValuationCoreTopicDividend Policy & PayoutCore

The formula

LaTeX
Ppref=DprefrP_{pref} = \frac{D_{pref}}{r}

Variables

market value of the preference share
fixed annual preference dividend per share
required rate of return on preference shares (decimal)

The perpetuity formula applied to a fixed, non-maturing dividend stream. Rising required returns reduce the preference share value exactly as rising yields reduce bond prices, demonstrating the same inverse price–yield relationship.

Check yourself

PracticeCORE

A 5 per cent cumulative preference share has a nominal value of €10. Investors currently require an 8 per cent annual return on securities of this type. What is the preference share's market value?

Select an answer to check your understanding.