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

Sundaram Ltd issues 12% irredeemable preference shares of face value ₹100 each at par, with no flotation cost. Dividend is payable annually. What is the cost of preference capital?

The cost of the irredeemable preference capital is 12 percent. Annual dividend of ₹12 divided by net proceeds of ₹100 gives 12 percent. Preference dividend is paid out of post-tax profit and gives no tax shield, so no tax adjustment is made.

  1. A12%Correct
  2. B8.4%
  3. C17.14%
  4. D10%

Explanation

Kp = Preference dividend / Net proceeds = 12 / 100 = 12%. Preference dividend is not tax deductible, so no tax adjustment applies. The 8.4% option wrongly applies a 30% tax shield (12 x 0.7).

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