Non-Participating Preference Share

Definition

A non-participating preference share is a type of preference share that provides the shareholder with a fixed dividend rate but does not grant them the right to receive additional dividends beyond this fixed rate, even if the company earns significant profits. This is the most common type of preference share as it gives more predictability regarding dividend payments but limits the potential for additional income in years when a company performs exceptionally well.

Examples

Company ABC issues non-participating preference shares with a fixed dividend rate of 6%. Regardless of how profitable Company ABC becomes, holders of these shares will only receive the 6% fixed dividend and do not get to share additional profits.
XYZ Corporation offers non-participating preference shares yielding 5% annually. If XYZ Corporation winds up with surplus earnings above projections, the non-participating preference shareholders are not entitled to any of that additional income.

Frequently Asked Questions

1. What are the main characteristics of non-participating preference shares?

Non-participating preference shares mainly feature a fixed dividend rate and do not allow shareholders to receive more than this fixed rate regardless of company profits.

2. How do non-participating preference shares differ from participating preference shares?

Participating preference shares give shareholders the right to participate in excess profits after receiving their fixed dividend, while non-participating preference shares do not.

3. What are the advantages of non-participating preference shares?

They provide a predictable and stable income stream through fixed dividends which is beneficial for conservative investors seeking regular returns.

4. Are non-participating preference shares considered safer than common shares?

Yes, they are generally considered safer since they offer fixed dividends and have a higher claim on assets in case of liquidation compared to common shares.

Once set, the fixed dividend rate typically remains the same unless there is a specific provision allowing for a change in the terms governing the shares.

Preference Share: A type of equity security that entitles the holder to receive dividends before common shareholders and often comes with additional rights or preferences over common stock.
Dividend: A portion of a company’s earnings distributed to shareholders, usually in the form of cash or additional share allocations.
Participating Preference Share: A type of preference share that entitles shareholders to participate in additional profits after receiving their fixed dividend.

Online References

Suggested Books for Further Studies

“Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey F. Jaffe
“Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
“Principles of Corporate Finance” by Richard Brealey, Stewart Myers, and Franklin Allen

### What is the hallmark feature of non-participating preference shares? - [ ] They allow shareholders to participate in extra profits. - [x] They only provide a fixed dividend rate. - [ ] They obligate companies to pay dividends quarterly. - [ ] They guarantee stock price appreciation. > **Explanation:** Non-participating preference shares only provide shareholders with a fixed dividend rate and do not include rights to additional profits. ### Are non-participating preference shareholders entitled to more dividends if the company earns higher than expected profits? - [x] No - [ ] Yes - [ ] Only if agreed upon annually - [ ] Depends on the company’s discretion > **Explanation:** Non-participating preference shareholders are not entitled to more dividends than the fixed rate, regardless of the company's additional profits. ### Which type of investor typically prefers non-participating preference shares? - [x] Conservative investors seeking stable returns - [ ] Speculative investors seeking high gains - [ ] Investors focused on capital gains - [ ] Venture capitalists > **Explanation:** Non-participating preference shares are attractive to conservative investors looking for predictable and stable income. ### Non-participating preference shares usually have which of the following dividend characteristics? - [ ] Variable based on profits - [x] Fixed and predictable - [ ] Cumulative if unpaid - [ ] Redefined annually > **Explanation:** These shares provide predictable, fixed dividends annually, regardless of the company's profits. ### Who has a higher claim on company assets in liquidation: non-participating preference shareholders or common shareholders? - [x] Non-participating preference shareholders - [ ] Common shareholders - [ ] Both have equal claims - [ ] It varies per company policy > **Explanation:** Non-participating preference shareholders have a higher claim on assets over common shareholders in case of liquidation. ### Can the term of the fixed dividend of a non-participating preference share be altered? - [ ] Yes, frequently - [x] No, it remains fixed unless specifically altered by provisions - [ ] Only under specific corporate performance conditions - [ ] Annually based on board decisions > **Explanation:** The fixed dividend rate usually remains unchanged unless specific alterations are included in the share agreement. ### In terms of dividend priority, where do non-participating preference shares stand? - [ ] After common shares - [x] Before common shares - [ ] Parallel to common shares - [ ] After debt distributions > **Explanation:** Non-participating preference shares have dividend priority over common shares, ensuring receipt of fixed dividends before any is shared with common shareholders. ### Would the income from non-participating preference shares be considered variable or stable? - [x] Stable - [ ] Variable - [ ] Depends on corporate earnings - [ ] Unpredictable > **Explanation:** Income from non-participating preference shares is stable due to the fixed dividend feature. ### What type of preference share grants the right to participate in additional profits? - [ ] Non-convertible preference share - [ ] Non-participating preference share - [x] Participating preference share - [ ] Convertible preference share > **Explanation:** Participating preference shares grant shareholders the right to additional profits beyond a fixed dividend. ### Which preference share type is more common in corporate finance? - [x] Non-participating preference share - [ ] Participating preference share - [ ] Convertible preference share - [ ] Redeemable preference share > **Explanation:** Non-participating preference shares are the most common type of preference shares in corporate finance due to their fixed, predictable dividend payouts.

Thank you for exploring the essential aspects of non-participating preference shares. By understanding these fundamentals, investors can make more informed decisions aligned with their financial goals and risk profiles.