Explain the difference between redeemable and irredeemable preference shares and calculate the value of the preference share under different scenarios.

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Asked on May 11, 2026Accounting

This accounting problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.

Accepted Answer · 2026-05-11T19:54:36.439Z

Okay, let's continue with Question 3 and Question 4. QUESTION THREE a) Explain the difference between redeemable and irredeemable preference shares and how this difference affects (8 marks) Redeemable preference shares have a specified maturity date, meaning the company repurchases them at a predetermined price, similar to debt. Irredeemable preference shares, conversely, have no maturity date and remain outstanding indefinitely, functioning as a perpetual security. This distinction significantly impacts their valuation; redeemable shares are valued like bonds, considering both periodic dividends and the final principal repayment, while irredeemable shares are valued as a perpetuity based solely on their constant dividend stream. Consequently, redeemable shares offer investors greater certainty of capital repayment, reducing capital risk compared to irredeemable shares, which carry the risk of never having the principal returned by the company. b) Calculate the value of the preference share under the following scenarios (12 marks) Given: Face Value (FV) = GH¢100 Dividend rate = 10% Required rate of return (r_p) = 11% First, calculate the annual preference dividend (D_p): D_p = GH 100 × 0.10 = GH 10 i) If the share has a maturity period of 6 years Step 1: Identify the given values for a redeemable preference share. D_p = GH 10 r_p = 0.11 FV = GH 100 n = 6 years Step 2: Calculate the present value of the annual dividends. PV (Dividends) = D_p × [ 1 - (1+r_p)^-nr_p ] PV (Dividends) = GH 10 × [ 1 - (1+0.11)^-60.11 ] PV (Dividends) = GH 10 × [ (1 - 0.53464)/(0.11) ] PV (Dividends) = GH 10 × 4.2305 PV (Dividends) = GH 42.305 Step 3: Calculate the present value of the face value (redemption amount). PV (Face Value) = FV(1+r_p)^n PV (Face Value) = GH 100(1+0.11)^6 PV (Face Value) = GH 1001.87041 PV (Face Value) = GH 53.464 Step 4: Sum the present values to find the intrinsic value (P_0). P_0 = PV (Dividends) + PV (Face Value) P_0 = GH 42.305 + GH 53.464 P_0 = GH 95.769 ii) If the share has no maturity date Step 1: Identify the given values for an irredeemable preference share. D_p = GH 10 r_p = 0.11 Step 2: Calculate the intrinsic value (P_0) using the perpetuity formula. P_0 =

Accepted Answer · 2026-05-11T19:54:36.439Z

Okay, let's continue with Question 3 and Question 4. QUESTION THREE a) Explain the difference between redeemable and irredeemable preference shares and how this difference affects (8 marks) Redeemable preference shares have a specified maturity date, meaning the company repurchases them at a predetermined price, similar to debt. Irredeemable preference shares, conversely, have no maturity date and remain outstanding indefinitely, functioning as a perpetual security. This distinction significantly impacts their valuation; redeemable shares are valued like bonds, considering both periodic dividends and the final principal repayment, while irredeemable shares are valued as a perpetuity based solely on their constant dividend stream. Consequently, redeemable shares offer investors greater certainty of capital repayment, reducing capital risk compared to irredeemable shares, which carry the risk of never having the principal returned by the company. b) Calculate the value of the preference share under the following scenarios (12 marks) Given: Face Value (FV) = GH¢100 Dividend rate = 10% Required rate of return (r_p) = 11% First, calculate the annual preference dividend (D_p): D_p = GH 100 × 0.10 = GH 10 i) If the share has a maturity period of 6 years Step 1: Identify the given values for a redeemable preference share. D_p = GH 10 r_p = 0.11 FV = GH 100 n = 6 years Step 2: Calculate the present value of the annual dividends. PV (Dividends) = D_p × [ 1 - (1+r_p)^-nr_p ] PV (Dividends) = GH 10 × [ 1 - (1+0.11)^-60.11 ] PV (Dividends) = GH 10 × [ (1 - 0.53464)/(0.11) ] PV (Dividends) = GH 10 × 4.2305 PV (Dividends) = GH 42.305 Step 3: Calculate the present value of the face value (redemption amount). PV (Face Value) = FV(1+r_p)^n PV (Face Value) = GH 100(1+0.11)^6 PV (Face Value) = GH 1001.87041 PV (Face Value) = GH 53.464 Step 4: Sum the present values to find the intrinsic value (P_0). P_0 = PV (Dividends) + PV (Face Value) P_0 = GH 42.305 + GH 53.464 P_0 = GH 95.769 ii) If the share has no maturity date Step 1: Identify the given values for an irredeemable preference share. D_p = GH 10 r_p = 0.11 Step 2: Calculate the intrinsic value (P_0) using the perpetuity formula. P_0 =

Explain the difference between redeemable and irredeemable preference shares and calculate the value of the preference share under different scenarios.

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Explain the difference between redeemable and irredeemable preference shares and calculate the value of the preference share under different scenarios.

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