CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital
Sundaram Textiles Ltd has issued 12% irredeemable preference shares of face value ₹100, each sold in the market at ₹96 with no issue costs. The company's tax rate is 25%. What is the cost of preference capital?
The cost of preference capital is 12.50%, found by dividing the ₹12 annual dividend by the ₹96 net issue price. Preference dividends are not tax-deductible, so no tax shield adjustment applies to this cost.
- A12.50%Correct
- B9.38%
- C12.00%
- D9.00%
Explanation
Cost of irredeemable preference capital = annual dividend / net proceeds = 12 / 96 = 12.5%. Preference dividend is paid out of after-tax profit and gives no tax shield, so no tax adjustment is made. The 9.38% option wrongly multiplies 12.5% by (1 - 0.25).
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