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

Sundaram Foods Ltd. issued 10% irredeemable preference shares of face value Rs 100 each. Each share was issued at Rs 80 and flotation cost is Rs 0 (ignore tax and dividend tax). What is the cost of preference capital?

The cost of irredeemable preference capital is the annual dividend divided by net issue proceeds. Dividend is Rs 10 on face value Rs 100, and proceeds are Rs 80, so the cost is 10/80 = 12.5 percent. Using face value instead gives the incorrect 10 percent.

  1. A10.00%
  2. B12.50%Correct
  3. C8.00%
  4. D11.11%

Explanation

Annual dividend = 10% x 100 = Rs 10. Net proceeds = Rs 80. Kp = 10/80 = 12.5%. Option A wrongly divides by face value 100.

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