Question

QUESTION FOUR [25]

4.1 Distinguish between:

4.1.1 A participating preference share and a convertible preference share. (3)

4.1.2 Share repurchase and a residual dividend. (3)

4.2 Cody Services has experienced a reasonable trading year. They are deciding whether to pay out R124 000 in accumulated cash in the form of a dividend to shareholders or embark on a share repurchase campaign. Current earnings are R3.60 per share and the share sells for R40. Their abbreviated Statement of Financial Position before paying out the dividend is as follows:

R

Assets

Tangible Assets 200 000

Inventories 20 000

Receivables 30 000

Bank/cash 150 000

Total 400 000

Equity and Liabilities

Equity 310 000

Debt 90 000

Total 400 000

Required:

Evaluate each alternative (i.e.: pay the dividend or repurchase the shares) by calculating the:

4.2.1 Number of shares in issue. (3)

4.2.2 Dividends per share (for the first alternative, i.e. pay the dividend). (3)

4.2.3 New share price (7)

4.2.4 Earnings Per Share (3)

4.2.5 Price-earnings ratio (3)

Answer 1

Answer 4.1.1Participating Preference Shares are those shares  where the preferance shareholders are given the right to participate in the profits after the equity shareholders are given their part of dividend .these shareholders recieves the fixed amount of dividend plus the additional dividend if any surplus is left after paying dividend to Equity shareholders.so basically they are called participating preferance shares because they have the right to participate in the profits of the company whereas the convertible preferance shares are those shares which can be converted into euity shareholders after a certain time In others words,they are issued as a preferance shares and then can be converted into equity shares or common stock the benefit is firstly these shareholders have a fixed income then they can an additional opportunity to convert themselves as equity to take advantage of rise in price of shares,so this is the basic difference between them

Another difference is Participating preferance shares always remain as preferance shares but Convertible Preferance shares are change into Equity Shares

Another Difference is Participating preferance shares only get extra dividend when their is Surplus left but Convertible Preferances Shares only get the fixed income or After being converted according to the market conditions

Answer4.1.2 Share Repurchase is also known as buy back of shares by the name itself we can understand that here the company purchases it own shares their are several reasons behind it either the company want to increase the market value of shares or they have enough cash to buy their own shares ,we can also simply consider it the way of giving  money back to the shareholders while residual dividend is the left over dividend or it is a kind of we can say a dividend policy in which the company does not  keeps the cash with themselves either they distribute the cash or invest it in the capital expenditure projects.In residual dividend policy either the company finds the profitable opportunity or it returns the money back to the shareholders