CS Executive · Corporate Accounting and Financial Management · Cost of Capital
Rao Textiles issues 10% irredeemable preference shares of face value ₹100 each at par, with no issue costs. What is the cost of preference share capital?
The cost is 10%. For irredeemable preference shares, cost equals annual preference dividend divided by net issue proceeds. Dividend is ₹10 on proceeds of ₹100 per share, with no flotation costs and no tax adjustment, giving 10%.
- A10%Correct
- B9%
- C11%
- D12.5%
Explanation
For irredeemable preference shares, Kp = annual dividend / net proceeds = 10 / 100 = 10%. No tax adjustment applies. The other options come from invented adjustments.
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