Skip to content

CA Intermediate · Financial Management and Strategic Management · Cost of Capital

Meridian Ltd has issued 10% irredeemable preference shares of face value ₹100 each, and the issue price equals the face value. Flotation cost is ignored. What is the cost of preference capital?

The cost is 10%. For irredeemable preference shares issued at par with no flotation cost, cost equals the dividend rate, since annual dividend of ₹10 divided by net proceeds of ₹100 gives 10%. Preference dividend is not tax-deductible, so no tax adjustment applies.

  1. A10%Correct
  2. B9%
  3. C11%
  4. D12%

Explanation

For irredeemable preference shares, Kp = Annual dividend / Net proceeds. Dividend = 10% of 100 = ₹10; net proceeds = ₹100 as issue is at par with no flotation cost. Kp = 10/100 = 10%. Tax is not considered because preference dividend is not tax-deductible.

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.

Practise Cost of CapitalFree diagnostic mock

More Cost of Capital questions