CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital
Kaveri Auto Ltd issues 9% irredeemable preference shares of ₹100 face value at ₹90 per share, with issue expenses of ₹0 on the face value but flotation cost of ₹5 per share. What is the approximate cost of preference capital?
The cost is about 10.6%. The annual dividend is ₹9 on face value, while net proceeds are the ₹90 issue price less ₹5 flotation cost, which is ₹85. Dividing 9 by 85 gives roughly 10.6 percent.
- A9.0%
- B9.5%
- C10.0%
- D10.6%Correct
Explanation
Dividend = 9% x 100 = ₹9. Net proceeds = 90 - 5 = ₹85. Kp = 9/85 = 10.59%, about 10.6%. Using the issue price alone (9/90 = 10%) ignores flotation cost.
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