Preference share

A share ranking ahead of ordinary shares for dividends and in liquidation, usually with a fixed dividend and no vote. If cumulative, missed dividends must be paid first, and it behaves more like a bond.

Where you will meet it

Preference share appears in 6 learning outcomes on the CFA syllabus. A few of them:

• Set out the kinds of equity security
  CFA Level I · Equity Investments

  “Preference shares rank ahead of common for dividends and in liquidation, usually without votes, and may be cumulative, meaning missed dividends accrue and must be paid before any common dividend, or non-cumulative.”

• Estimate what a firm is worth with the free cash flow model or models that fit it
  CFA Level II · Equities

  “To value a company from FCFF, discount the forecast flows at the WACC, add a terminal value at the horizon, usually FCFF(n+1) ÷ (WACC − g), also discounted, then subtract the market value of debt, and of preferred shares if any, to reach equity, which divided by shares outstanding gives a per-share value.”

• Explain the distinguishing traits of venture deals and of growth equity deals
  CFA Level III · Private Markets Pathway

  “It usually buys convertible preferred shares carrying liquidation preferences, anti-dilution protection and board or veto rights.”

• Explain the return and risk features of equity securities
  CFA Level I · Equity Investments

  “Preference shares are less risky than common because their claim is prior and their dividend fixed, and putable shares less risky than ordinary ones.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
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All terms beginning with P · Glossary