CA Intermediate · Financial Management and Strategic Management · Cost of Capital
Ananya Textiles Ltd issued 10% irredeemable preference shares of face value ₹100 each. The shares were issued at ₹100 and flotation costs are ₹5 per share. Ignoring dividend distribution tax, what is the cost of preference capital (to the nearest 0.01%)?
The cost of irredeemable preference capital is the annual dividend divided by net proceeds. The dividend is ₹10 and net proceeds after ₹5 flotation cost are ₹95, so the cost is 10/95, about 10.53%. Using face value alone would wrongly give 10%.
- A10.00%
- B10.53%Correct
- C9.50%
- D15.00%
Explanation
Annual dividend = 10% × 100 = ₹10. Net proceeds = 100 - 5 = ₹95. Kp = 10/95 = 10.526%, i.e. 10.53%. Using 10/100 ignores flotation costs, giving 10.00%. Check: 95 × 10.53% ≈ 10.0.
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