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
Replies (2)
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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?
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
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.