IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies
Aarav Textiles has 50,000 irredeemable preference shares of face value Rs 100 and a 10% dividend rate. The shares trade at Rs 80 ex-dividend. Ignoring issue costs and tax, what is the cost of this preference capital?
The cost of irredeemable preference shares is the annual dividend divided by the market price. The dividend is Rs 10 and the price is Rs 80, giving 12.5%. Using the face value of Rs 100 would wrongly give 10%.
- A8.0%
- B10.0%
- C12.5%Correct
- D15.0%
- 125%
Explanation
The annual dividend is 10% x 100 = Rs 10 per share. The cost is dividend divided by market price: 10/80 = 12.5%. The 10% option wrongly uses face value as the base.
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