CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital
Sundaram Pharma Ltd issues 10% redeemable preference shares of ₹100 face value at par, redeemable after 5 years at par, with no issue costs. Using the approximate yield formula Kp = [D + (RV - NP)/n] / [(RV + NP)/2], what is the cost?
The cost is 10%. Because the shares are issued and redeemed at par with no issue costs, the redemption adjustment is zero. The annual dividend of ₹10 divided by the average of redemption value and net proceeds, ₹100, gives 10 percent.
- A8.0%
- B9.5%
- C10.0%Correct
- D10.5%
Explanation
D = ₹10, RV = ₹100, NP = ₹100, n = 5. Numerator = 10 + 0 = 10; denominator = (100+100)/2 = 100. Kp = 10%. Since issue and redemption are both at par, there is no gain or loss to adjust.
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