CS Executive · Corporate Accounting and Financial Management · Cost of Capital
Iyer Pharma issues 8% redeemable preference shares of ₹100 each at par, redeemable at par after 10 years, with no issue costs. Using the approximation formula Kp = [D + (RV - NP)/n] / [(RV + NP)/2], the cost is approximately:
The cost is 8%. Since shares are issued and redeemed at par, the annual amortised difference is zero. The formula gives dividend of ₹8 divided by average of redemption value and net proceeds, ₹100, which equals 8%.
- A8.00%Correct
- B9.00%
- C10.00%
- D7.27%
Explanation
D = 8, RV = 100, NP = 100, so (RV - NP)/n = 0. Numerator = 8; denominator = (100+100)/2 = 100. Kp = 8%. Redemption at par with issue at par adds no gain or loss.
Did you get it right without looking?
One question tells you little. A timed set on Cost of Capital shows your real accuracy, how long you take and where you lose marks.
More Cost of Capital questions
- Which statement about the cost of debt is correct in capital cost theory taught for financial management?
- A company's capital structure at book values is: equity Rs 6,00,000 (cost 15%), preference Rs 2,00,000 (cost 12%) and debt Rs 2,00,000 (post…
- Arjun Ltd. issues 12% debentures of Rs 1,000 face value at par, redeemable at par after 5 years. Flotation cost is Rs 50 per debenture on is…
- Sundaram Ltd plans to raise Rs 10,00,000 of new capital in the proportion 40% debt and 60% equity. After-tax cost of new debt is 6% and cost…
- Ananya Textiles raised Rs 10,00,000 through 12% debentures issued and redeemable at par. The tax rate is 25% and flotation costs are nil. Wh…
- Sundaram Textiles Ltd has an expected dividend next year (D1) of Rs 6 per share, a current market price of Rs 100 per share and a constant g…