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.
See it move
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.
The formula
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
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?