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CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital

Meridian Textiles Ltd issues 10% irredeemable preference shares of face value ₹100 each at par. No issue costs are incurred. Ignoring dividend distribution tax, what is the cost of this preference capital?

The cost is 10%. For irredeemable preference shares issued at par without issue costs, cost equals the annual dividend of ₹10 divided by net proceeds of ₹100. Preference dividends are paid out of post-tax profit, so no tax adjustment applies.

  1. A7.5%
  2. B10.0%Correct
  3. C12.5%
  4. D100.0%

Explanation

For irredeemable preference shares, cost = annual dividend / net proceeds. Dividend = 10% x 100 = ₹10; net proceeds = ₹100. Kp = 10/100 = 10%. The 7.5% figure wrongly applies a tax shield, but preference dividend is not tax deductible.

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