CS Executive · Corporate Accounting and Financial Management · Cost of Capital
Mehta Ltd issues 9% irredeemable preference shares of ₹100 face value at ₹90 per share, with issue expenses of ₹10 per share on the issue price. What is the cost of preference capital?
The cost is 11.25%. Dividend is computed on face value, 9% of ₹100 = ₹9, while net proceeds are ₹90 less ₹10 issue expenses = ₹80. Dividing 9 by 80 gives 11.25%.
- A9.00%
- B11.25%Correct
- C10.00%
- D12.50%
Explanation
Net proceeds = 90 - 10 = ₹80. Dividend = 9% of 100 = ₹9. Kp = 9/80 = 11.25%. Using 90 as the base gives 10%, which ignores issue costs; 9% ignores both discount and costs.
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
- Kaveri Industries has a target structure of 30% debt, 10% preference shares and 60% equity. The costs of new funds are: debt after tax 7%, p…
- Under the earnings-price approach with no growth, a firm's expected earnings per share is Rs 18 and the market price is Rs 150. The cost of …
- Which cost of debt should be used when computing WACC for a company that pays tax?
- A company has 12% debentures of ₹1,00,000 outstanding, trading at par, with a tax rate of 25%. If the tax rate rises to 30%, what happens to…
- Which statement about the cost of debt is correct in capital cost theory taught for financial management?
- Which weighting basis for WACC is generally regarded as theoretically superior because it reflects current investor expectations?