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Preferred Shares (Debt or Equity) | Top 6 Types of Shares - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell icon friends I welcome
to you to the tutorial of preferences
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and there's a question debt or equity so
let's get into the nitty-gritty what
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exactly are we talking about here see at
the very first and the initial state at
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the edge at the inception what are
preferred shares or or classes of shares
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one are known as the common shares which
we call as equity shares and the another
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one are called preferential or the
preferred share capital right the common
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or the equity share holder represents
the ownership in the company the holder
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of the company's share may or may not be
entitled to dividend depending upon the
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profitability of the company on the
other hand if we talk about the
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preference share holders and that is the
preferred share they are entitled to
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fixed dividend this is very important
they are entitled to fixed dividend
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irrespective the profitability of the
company so dividends that have been
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received on the preferred stock are
known as preferred dividends okay so in
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this tutorial we are going to discuss a
number of things regarding preferential
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capital and preferred shares so let's
get into the details first what are
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preferences or preferred shares it can
be either of the to see accompany issues
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as I told you two types equity and
preferred equity has the ownership in
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the company and the preferred
shareholders they are entitled Oh
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dividend right you know they are known
as preferred because you know in case a
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company is unable to pay all the
dividends it can claim to preferred
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dividends and will take precedence over
the claim to the dividends paid on
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equity shareholders there is a company
called Diana shipping let me show you
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some details regarding the same
now there's this company called Diana
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shipping Inc we went through the
company's detailed online and we on
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their website and we found this details
like dividend amount per share right
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from all the dates from 2014 to 2016 all
the dividends that have been paid
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so first preferred share dividend
calculation which is very important so
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let's understand this calculation of
preferred dividend with the help of an
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illustration let me get to the excel to
make you understand know let's say mr. X
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he owns 20000 okay and 10% of the preferred shares were
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issued at a par value okay I'll just say
10% of the preferred share or
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provincial capital of which were been
issued at the par value of $50
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so this was basically the price okay now
currently the stock sorry no this is not
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the price this is the price at which it
has been issued and these the current
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market price
that a CMP is $60 but there's
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a difference so let's do some preference
dividend calculation over here this is
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our example see the dividend per share
of preferred share will be is equal to
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that at the amount at which it has been
issued into 10% as you can see
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10% of the preference share right so
that would be how much $5
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because we have mentioned over here just
let me write 50 so automatically we will
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get answer as 5 so $5 so the
total preference dividend is going to be
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we had 10 shares right into 50
that is the price at which it has been
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issued into 6.5% that
will give us 32.500
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see for calculation the
preferred dividend multiply the par
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value multiplied the par of the issue
value of the preferred shares by the
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dividend percentage
dividend percentage is stated in the
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Prospectus of the preferred shares
alternatively you know the percentage is
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also stated in the share certificate
issued by the company now let's learn
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the next thing that I want to take you
to the yield calculation the preferred
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dividend yield calculation see the
dividend yield ratio is nothing but the
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price the the amount of the dividend
that is 5 divided by the current market
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price just change it to 60 and we get
the detail as 8.33 in terms of
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percentage or 8 so yield is effective
interest rate and that a person receives
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if he holds the shares of 1 year
the formula of dividend yield is quite
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simple you know the dividend yield that
is dy is equal to the dividend per share
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that has dps divided by the market price
per share and you multiply the whole
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into 100 now there are top 6 types
of preferred dividends so let's get into
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each and every detail first there is the
first one that is called as cumulative
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preference shares see in case of the
cumulative preference shares the
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preferred dividend always gets
accumulated for the subsequent years and
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such type of preferred shares includes
provisions wherein company is required
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to pay all the difference okay there is
second one which is known as the
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opposite of the same that is
non-cumulative preference shares see in
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case of the non cumulative preference
shares there are no legal obligations on
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the company to pay the past accumulated
dividends if a company does not pay
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dividends on account of the business
exigency or otherwise shareholders have
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no right to claim unpaid dividend in the
future
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the third one is basically the
convertible the convertible preferences
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see this type of shares over here I can
just say this type of shares
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gives it holders a legal right but not
an obligation to exchange for pre-
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determine numbers of companies equity or
common stock conversion may occur at a
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predetermined time or at any time the
investor chooses so conversion occurs at
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an exercise price which is always
determined a predetermined price this
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type of preferential towards its holder
to participate in the equity shares by
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the way of conversion forth is basically
the participating preferences see in
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this case it provides the shareholders
in opportunity to receive additional
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dividends apart from the normal regular
dividends additional dividends you can
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say are paid by the company on achieving
certain predetermined milestones like
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you know you can say over here hurdles
hurdles is a very good way of signifying
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this particular case
so the net profit as you know the the
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benchmark is going to be something sort
of like you know the hurdles will be
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like the revenue or your net profit of
the company and so on and so forth so
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the shareholder continued to receive
that regular dividends regardless of the
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company achieving predetermined
milestones or not the 5th type that is
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known as perpetual preference shares in
case of the perpetual preference shares
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this type of preferences do not have any
maturity period in case of the perpetual
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preferences initial invested capital is
never returned to the shareholders
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shareholders they continue to receive
preference dividend for in finite period
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over here as the name itself over here
suggests perpetual right so most of the
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preferred shares fall into this
particular category
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now 6th one that we need to discuss is
the prior preference shares see
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companies generally issue more than one
type of preferences that is they may
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show convertible or like non-convertible
that is the opposite of the same or
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participating or non-participating
etc etc see any preferred
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shares which is designated as a prior
preferred stock by the company will have
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you can say a prior claim on the
dividend over the types of the
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preference talk therefore you know it
can be seen that you know the prior
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preferably have less credit risk
than the other preferred stocks let's
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understand this with a very simple
illustrations so illustration there is
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let's say that is company called X Inc
okay it is some following details let me
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mention some of the same it has a 6%
series of X Perpetual preferences shares
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okay which is close enough to let's say
5 million everything will be over here
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in millions a 6% preference
shares of C is X
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I'll just write over here as this will
be your series now there is another
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series that is Z which is prior preferred share and it is also again 6%
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and the value is again over here 5
million the available cash that they
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have is let's say 3,00,000 so in the
above case the dividend will be paid
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like as follows you know dividend paid
on C's X and Z let's just write the
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details over here the dividends will be
something set sort of as equal to 5
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million into 6% right close the
bracket into $3,00,000 that is
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the available cash so there we go we
have the answer as 90000 and
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for dividend paid for Z is going to be
5 million into 6% 3,00,000
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so the total dividend that needs to be
paid let me just calculate for you
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5 million into 6% is equal
to 5 into 6% and once we close
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this just close this in the bracket and
multiplied with this 3,00,000
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that is 9,00,000 so since in the above
case you know there is basically a
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shortage of cash available for the
payment and the total dividend liability
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hence you know the only dividend upto 3,00,000 will be paid to the shareholders
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and payment will not be distributed
among the series of x and z now my next
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question to you all is that is preferred
share equity or debt which is the most
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important thing that we need to discuss
you see preferential is basically hybrid
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security shares some feature of debt
instrument and sum of equity why equity
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some of the equity features like you
know it is perpetual life
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right in the financial statement it is
shown under shareholders equity section
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and not on the due debt column while
interest payment on the debt are
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tax-deductible preferred dividends are
not tax deductible in case of the debt
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feature we learned the equity feature
now let's learn the debt feature in case
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of debt feature the preferential shares
have a very amount called as fixed
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dividend payout as stock carries fixed
dividend rate in fact investing in
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preferences is more like investing in
debt instruments rather than equity
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since almost all the return comes in the
form of dividends as it can be seen from
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the stated facts if preferences exhibits
the feature of both equity and debt
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hence the classification of preference
shares and the debt or equity would
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depend upon the type and nature of the
preferred stock see perpetual and
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cumulative preferred share stock can
easily be transferred as debt
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instruments since the dividends received
from them are fixed and invested capital
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never gets refunded on account of their
infinite period whereas you know if we
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talk about the non-cumulative I'll just
write for you non cumulative or
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convertible exchange
oh sorry convertible preference shares
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are classified over here as equity hence
it can be said you know that this type
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of preferences share plays a very important
role with respect to the classification
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of the preference shares now the next
thing that we need to understand who are
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the users of the preferences see the
cost of the preferential is more than
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the cost of the debt but less than the
cost of equity instruments so this
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reason is simple the cost depends upon
the riskiness the cost depends on the
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riskiness associated with the instrument
among all the three types instrument
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mentioned you know about the financial
risk is holding an equity stock and is
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far greater due to the tax advantages of
the interest payments and uncertain
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eight-teen is associated with the its
dividend premium on the other hand if
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you see the cost of the preference share
which is greater than the cost of debt
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on account of the tax advantage you know
and despite it being very costlier than
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debt it is preferred by the large number
of companies for raising additional
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Capital among US companies the biggest
issue of the preferences of the
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financial companies are like banks
insurance companies just right for you
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insurance companies then you have and so
on and so far and I know there is one
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simple reason for it you know why
because it may be very very much
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expensive than the convertible debt and
it is counted as equity by the
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regulatory authorities while computing
the capital ratios for the bank so let's
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make the final conclusion to our tutorial
over the years preferred shares have
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become quite popular popular instrument
used by the corporate for raising funds
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preferred shared combines the feature of
both debt and equity and though the
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preferred dividend payment depends upon
the number of factors such as like our
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ability of cash profitability of the
company but the shareholders right to
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receive is absolutely and is not
affected by the above factors so in case
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the shortage of the fund it is paid at
the later stage and all these factors
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have contributed to the growing
popularity of the preferred shares over
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the other forms of investment so that's
it for this particular topic if you have
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learned and enjoyed watching this video
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