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The following financial information relates to Dazvin Co, a company that is listed on a large stock market
$m
Revenue 35.5
Cost of sales (20 0)
Other expenses (8.4)
Finance costs (1.4)
Profit before taxation 5.7
Corporation tax (30%) (1.7)
Profit for the year 4.0Equity and liabilities $m
Ordinary share capital 26.0
Preference share capital 10.0
Retained earnings 21.5
Total equity 57.5
Non-current liabilities
Long-term borrowings 18.0
Current liabilities
Trade payable 11.1
Total liabilities 29.1
Total equity and liabilities 86.6The preference share capital consists of irredeemable 6% preference shares with a nominal value of $0.50 per share. The cost of capital of the preference shares is 8%.
The ordinary shares have a nominal value of $1.00 per share. Dazvin Co has a price/earnings ratio of 12 times. Future share price growth on the stock market is expected to be 6% per year
The long-term borrowings consist of 7.5% convertible loan notes with a nominal value of $100 per loan note. These loan notes can be converted at the end of six years into 40 ordinary shares of Dazvin Co, or redeemed on the same date at their nominal value of $100 per loan note. Dazvin Co has a before-tax cost of debt of 6%.
What is the market value of the preference shares of Dazvin Co?
A. $10.71m
B. $7.50m
C. $5.25m
D. $3.75mI approached the question like this :
Preference shares of 10m / Nominal Value of 0.5 = 20m
20m * Interest of 6% = 1.2m
Prefrence shares MV calculating method — PREFERENCE SHARES / COST OF EQUITY = MV
So , 1.2m / 0.08 cost of equity = 15m which is wrong obv
Can you please help me here
The correct answer is B.
Preference dividend = 0.50 × 0.06 = $0.03 per share
Preference share value per share P0 = 0.03/0.08 = $0.375 per share
Number of shares = 10/0.5 = 20m
Total market value = 20m × 0.375 = $7.50mAre they multiplying the preference shares of 6% with the nominal value of 0.5 since we’re only supposed to find the MV of the IRREDEEMABLE SHARES ?
I’m sorry if it doesn’t make senseThe market value of the preference shares of Dazvin Co can be calculated using the formula:
Preference shares / Cost of equity = Market value.
In this case, the preference shares have a nominal value of $0.50 per share and a cost of capital of 8%.The calculation is as follows: Preference shares / Cost of equity = Market value. Therefore, 10m / 0.5 = 20m shares. The preference dividend is calculated as 0.50 × 0.06 = $0.03 per share.
The preference share value per share is calculated as 0.03/0.08 = $0.375 per share. The total market value is then calculated as 20m × 0.375 = $7.50m.
I understand why we divide the nominal value from the preference shares but i don’t undertsand why we have to multiply it again ?
Please lemme know
The preference share capital consists of irredeemable 6% preference shares with a nominal value of $0.50 per share.
So the share value is only half of a dollar value, so every share takes 3% rather than 6% as interest/return
The cost of capital of the preference shares is 8%.So divide by 8% cost to get the true value per share and multiply by the number of shares.
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