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High % preference shares

Hi,

I have been posed with a question which has me stumped.  I tried a Google and accountingWeb search but to no avail.

I know how preference shares work, both legally and in accounting treatment, but can you have a preference share which pays an annual dividend greater than its nominal value?  i.e. can you have a 1,000% or 10,000% or 1,000,000% preference share?

Thanks,

Thomas

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Interesting question!

There could be an aspect of tax avoidance here if the interest rates payable are punitively high thereby removing the profits from a business.

I can't see a sensible argument for having such high rates of interest on a preference share.

Is this purely a hypothetical?

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Possible logic for a high coupon preference share

Is it true that the higher the coupon on a quoted preference share the greater the capital loss if it due to be redeemed

If you buy something like the Yorkshire 13.5% note due to be redeemed in 2025 it will cost you £144 per £100 nominal vale and yield 9.38% initially and the yield to redemption would be 7.82% pre tax

http://www.thisismoney.co.uk/money/markets/article-1583858/Permanent-bearing-shares--PIBS-rates-table.html

So I think a 40% tax payer would pay income tax of 9.38% reducing the yield to redemption from 7.82% to  4.068% =      (7.82% -40% *9.38%)

However for every £14,400 you purchased you would also get a capital loss of £4,400 when the note is redeemed.

 

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