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(^54) Financial Management
Stock Price Quotations
If you pick up any of the major newspapers (financial or non financial), they carry at
least some of the quotations of the last day's trading on the major stock exchanges, be
it National Stock Exchange (NSE), Bombay Stock Exchange (BSE), or any other stock
exchange.
The usual format in a financial newspaper is to carry four prices (open, high, low, close)
along with volumes of shares traded and number of trades. Price/ Earning Ratio (P/E)
and market capitalization is also carried. They also carry the closing share price of the
previous trading day in a bracket before starting with yesterday's prices as also carry
the previous 52 week (one year) high/low prices for that share. The prices mentioned
are for one share of the company.
Figure 2.2 shows two samples taken from the Business Standard and The Economic
Times. See the reporting differences. The Business Standard carries more information
on top 200 companies and different information is carried every day of the week.
Types of Equity Instruments
There are basically two types of equity instruments: equity shares and preference shares.
What we have been discussing till now in equity instruments applies as it is to equity
shares. Preference shares are different.
Preference Shares
Sandwiched between debt holders and equity share holders, preference share holders
have the promise of an assured dividend from the company and therefore assume less
risk than that borne by equity share holders. They do not have any voting rights in the
company. When a company fails to pay the dividend to them for two years in a row,
then these shares get a voting right.
The preference shares are issued by only those companies who are paying a very low
level of tax. Why? This is because although the returns desired by the preference
share holders is at par with the returns offered by the fixed deposits, the cost to the
company is after tax in case of preference shares while the interest paid on fixed
deposits is tax deductible.
So a company which is paying 10 per cent dividend on preference shares ends up
paying 11 per cent (including 10 per cent dividend tax). If the company pays no income
tax [as in the case of a 100 per cent Export Oriented Unit (EOU)] then this is the cost
to the company. If the company pays tax at the rate of 35 per cent then the before tax
cost shoots above 14 per cent. Compared with a debt cost of 7 to 12 per cent for
established companies, it is not a viable alternative at all to go in for preference shares
if the tax liabilities are high. Therefore, preference shares would only be issued if the
company requires a more permanent source of capital.