Explanation

For perpetual preference shares, the value is calculated using the formula:

$V = \frac{D}{r}$

Where:

• $V$ = Value of the preference share
• $D$ = Annual dividend per share
• $r$ = Required rate of return

Calculating the value of Preference Share 1: V_1 = \frac{\`$6`}{0.08} = \`$75`

Calculating the value of Preference Share 2: V_2 = \frac{\`$8`}{0.11} = \`$72.73`

Comparison:

• Preference Share 1 value = $75
• Preference Share 2 value = $72.73

Since $75 > $72.73, the value of Preference Share 1 is greater than the value of Preference Share 2.

Key Insight: Even though Preference Share 2 has a higher annual dividend ($8 vs $6), it also has a significantly higher required rate of return (11% vs 8%). The higher discount rate reduces the present value of the perpetual dividend stream more than the higher dividend amount increases it, resulting in a lower overall value for Preference Share 2.