- Shareholders Equity
- Shareholders Equity Statement
- Equity Formula
- Paid in Capital
- Shareholder's Equity Formula
- Equity Examples
- Shares Issued
- Proxy Statement
- Negative Shareholders Equity
- Par Value of Stock
- Nominal Value of Shares
- Par Value of Share
- Premium on Stock
- Ordinary Shares Capital
- Share Classes
- Ordinary Shares
- Book Value of Equity
- Book Value Formula
- Shares Premium
- Share Capital
- Stock Certificate
- Common Stock Formula
- Class A Shares
- Diluted Shares
- Global Depository Receipts (GDR)
- Stock Dilution
- Floating Stock
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Issued vs Outstanding Shares
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- Retained Earnings Formula
- Statement of Retained Earnings
- Appropriated Retained Earnings
- Unappropriated Retained Earnings
- Statement of Retained Earnings Examples
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Net Worth Formula
- Tangible Net Worth
- Owners Equity
- Owner's Equity Formula
- Owner's Equity Examples
- Preferred Shares
- Callable Preferred Stock
- Redeemable Preference Shares
- Non-Cumulative Preference Shares
- Participating Preferred Stock
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Reverse Stock Split
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Dividend Policy
- Types of Dividends
- Dividend Examples
- Is Dividend Expense?
- Dividend Policy Types
- Dividend Reinvestment Plan
- Dividends Ex-Date vs Record Date
- Dividend Declared
- Dividend Payable
- Stock Dividend
- Cash Dividend
- Final Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Qualified vs Ordinary Dividend
- Equity vs Royalty
- Commodity vs Equity
- Shares vs Debentures
- Equity vs Shares
- Equity Shares vs Preference Shares
- Wealth vs Profit Maximization
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Shares Vesting
- Stock Warrant
- Employee Stock Option Plan (ESOP)
- Non-Qualified Stock Options
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Accounting Basics (80+)
- Bookkeeping (52+)
- Balance Sheet (30+)
- Assets (109+)
- Liabilities (68+)
- Income Statement (158+)
- Cash Flow Statement (17+)
- Accounting Careers (27+)
- Accounting Books (8+)
- Budgeting in Finance (31+)
What are Redeemable Preference Shares?
Redeemable Preferences shares are those type of preference shares issued to shareholders which have a callable option embedded, meaning they can be redeemed later by the company.
- It is one of the methods that companies embrace in order to return cash to the existing shareholders of the company. It is a way of share repurchase but is different from traditional share repurchases in certain ways.
- The prices at which companies can repurchase these redeemable shares are already decided during the time of issuing those shares.
- Issuing callable preferential shares which can be redeemed in the future provides the company flexibility to choose from whether to go for share repurchase or go for shares redemption.
Simple Example of Redeemable Preference Shares
Let us assume an arbitrary example in order to see how the shares are redeemed by a company A. Let’s assume that the company during using the redeemable preferential shares had a call option for those share at $180 at the predetermined time frame. Suppose the shares are trading at the market price of more than the callable price then the company can call the redeemable preferential shares. When the price of the company is lesser than the call price than the company can go for share repurchase instead of redeeming the shares. If they are not able to secure a share repurchase they can always fall back for the option of redeeming the shares. That way the company has greater flexibility if it has issued redeemable shares.
4.9 (1,067 ratings)
The redeemable preferential shares if any are reported by the company in its balance sheet in the shareholder’s equity section. Below is the snapshot of the shareholder’s section of the balance sheet where the information of redeemable preference shares reported by the company.
In the example depicted here, there are two sets of redeemable preference shares, one of them is 4000 in the count of shares.
- The coupon rate paid by the company for this redeemable preference shares is 10%.
- For the other, the share count is 2000. The coupon rate paid by the company for this redeemable preference shares is 9%.
Advantages of Redeemable Preference Shares
The advantages of redeemable preference shares are as follows-
- Issuing redeemable preferential shares provides the company with an option to choose between whether to repurchase shares or redeem shares depending on the market condition.
- The company redeems shares when it decides to pay back the shareholders. It is a way of paying the shareholders similar to paying dividends. When shares are redeemed by the companies the number of total shares outstanding reduces for the company, and the earning per share or the EPS of the company increases which leads to the increase in share price.
- By redeeming shares the company most of the times get rid of shares which were paying coupon rates which are much higher than the current dividend yield for the equity share. Thus increasing the value for the existing shareholders of the company.
- Redeemable preferential shares often provide exit opportunities for the venture capital funds who are provided with predetermined exit option at a predetermined time and predetermined price point.
Disadvantages of Redeemable Preference Shares
The disadvantages of redeemable preference shares are as follows-
- These kinds of shares are feasible for the companies to redeem only when the call price of the shares are lower the current market price of the shares, otherwise, it’s logical for the company to go for share repurchases instead.
- The company needs to wait for the time predetermined during issuing the shares before being able to redeem the shares.
Limitations of Redeemable Preference Shares
The limitations of redeemable preference shares are as follows-
- The company can only redeem shares if it has issued redeemable shares earlier, otherwise, the company does not have the option to redeem its shares.
- The company needs to wait to the time after which it can exercise the option of redeeming the shares of the company. The company also needs to wait for the current market price to be favorable for it to redeem the shares.
Important Points to Note
- The company can only redeem shares if it has issued redeemable preference shares, otherwise, the company do not have the option to redeem its shares.
- If a company has issued redeemable preference shares, then it provides the company with an option to choose between whether to repurchase shares or redeem shares depending on the market condition.
It a way of paying the existing shareholders, very similar to paying dividends to the shareholders. By redeeming preference shares the company is most cases get rid of higher paying coupon rate securities, in a way increasing the shareholder’s value. By redeeming preference shares the number of total outstanding shares decreases and the EPS of the company increases, which increases the value of the company. When a company has issued redeemable preferential shares, it provides the company with an option to choose between whether to repurchase shares or redeem shares.
This has been a guide to Redeemable Preference Shares and its definition. Here we discuss Redeemable Preference Shares simple and practical examples along with its advantages, disadvantages & limitations. You may learn more about finance from the following articles –