Share

A share is referred to as a unit of ownership which represents

an equal proportion of a company’s capital. A share entitles the
shareholders to an equal claim on profits and losses of the
company.
 Types of share
There are mainly two types of share:
I. Preference shares: Preference shares have preferential rights to dividends if a business closes.
Preference shares do not have voting rights available, except in specific situations.
II. Equity shares: Equity shares do not have preferential rights. Instead, they receive payment
from dividends and repayment of capital after preference shares' claims were settled. The
specific rate of return is decided by the board members and directors. Equity shares are often
used to raise money for the company and are referred to as the owner's funds. It is possible that
an equity share will not pay any dividends if the business does not profit. While preference
shareholders get a fixed rate, equity shareholders may receive varying payments each year.
Equity shareholders are often owners of the company and have regular voting rights available.
 Differences between Share and Bond

S.N Basis for Comparison Share Bond

Meaning
An Equity instrument representing an ownership A debt instrument with a promise to pay back the
 1  
interest in a corporation. principal amount with interest.
 
Government institutions, Financial institutions,
 2 Who are the issuers? Corporates
Companies etc.
 3 Status of holders Shareholders are the owners of the company. Bondholders are the lenders to the company.
 4 Form of Returns Dividends Interest (coupon amount)
High since it depends upon the performances of Relatively low since bondholders are prioritized
 5 Risk Level
the issuer, so no guaranteed returns. for repayments.
 6 Major risk associated Market risk, Business risk. Interest rate risk, Inflation risk
Bondholders get the preference in terms of
 7 Additional Benefit Shareholders get the right to vote.
repayment.
 8 Profit earned on investment Not fixed Fixed
In the event of the liquidation of a business, the
Bondholders have a considerably higher
 9 Priority of repayment. shareholders have the last claim on any residual
priority, depending on the terms of the bonds.
cash.
 Formula for calculating share value:
•1.  For Zero-Growth:
S0 = Where,
S0 = Value of the share
D0 = Current year dividend
2. For Constant-Growth:
K = Required Rate of Return
S0 = Here, = (1+g) G/g = Growth Rate
 Formula for calculating share value (Con’d……)

•3.  For Variable Growth:

Where,
S0 = + + - - - - - + S0 = Value of the share
D0 = Current year dividend
K = Required Rate of Return
Dn+1 G/g = Growth Rate
Here, = (1+g) and Sn = Sn = Selling price that will be realized at the end of
K-G
year n.
D2 = D1(1+g) Dn= Dividends that are expected to receive at the
end of year n.
D1= Dividends that are expected to receive at the
Dn = Dn-1(1+g) end of year 1.
D2= Dividends that are expected to receive at the
end of year 2.
Formula for calculating share value (Con’d…)
Where,
S0 = Value of the share
•  K = Required Rate of Return
Sn = Selling price that will be realized at the end of
4. One Year Holding Period year n.
Dn= Dividends that are expected to receive at the
S0 = end of year n.
D1= Dividends that are expected to receive at the
end of year 1.
5. Multiple Year Holding Period D2= Dividends that are expected to receive at the
end of year 2.
S0 = + + - - - - - +
• 
Example: Bangladesh Lamps Limited currently pays an annual dividend of tk. 18 per share of its
common stock. If the investor requires a required rate of 12%, estimate the value of the common
stock under each of the following dividend growth rate assumptions:
a. Dividends are expected to grow at an annual rate of zero percent to infinity.
b. Dividends are expected to grow at an annual rate of 5 percent to infinity.
c. Dividends are expected to grow at an annual rate of 5 percent for the next 3 years followed by a
constant growth rate 4 percent from the year four to infinity.
Solution:
d. S0 = = = 150

e. S0 = = = 270  Here, = (1+g)

= 18(1+.05) = 18.9
• 
 𝐷₁ = 𝐷₀(1+g) = 18(1+.05) = 18.9
D2 = D1(1+g) = 18.9(1+.05) = 19.85
D3 = D2 (1+g) = 19.85(1+.05) = 20.84
c. S0 = + + D4 = D3 (1+g) = 20.84(1+.04) = 21.67

= + + And,

= S3= = = = = 270.88