CA Intermediate · Financial Management and Strategic Management · Cost of Capital
Sunrise Textiles Ltd has issued 10% irredeemable preference shares of Rs 100 each at par. Floatation cost is 5% of the issue price. What is the cost of preference capital (to the nearest two decimals)?
The cost of irredeemable preference capital is the annual dividend divided by net proceeds. Dividend is Rs 10 and net proceeds after 5% floatation cost are Rs 95, so the cost is 10/95, which is 10.53%.
- A10.00%
- B10.53%Correct
- C9.50%
- D5.26%
Explanation
Net proceeds = 100 - 5 = Rs 95. Dividend = Rs 10. Kp = 10/95 = 10.526%, or 10.53%. Option A ignores floatation cost. Option C wrongly multiplies 10% by 95%, which gives 9.5%.
Did you get it right without looking?
One question tells you little. A timed set on Cost of Capital shows your real accuracy, how long you take and where you lose marks.
More Cost of Capital questions
- Under the CAPM, the risk-free rate is 7%, expected market return is 13% and a company's equity beta is 1.5. What is the cost of equity?
- Kaveri Industries issued 12% irredeemable debentures of ₹1,000 each at par. Flotation cost is 2% of face value, and the tax rate is 25%. Wha…
- Ganga Foods Ltd expects EPS of Rs 25 next year and pays out 60% of earnings as dividend. It earns 10% on retained funds, and the current sha…
- Meridian Textiles Ltd issues 10% irredeemable preference shares of face value ₹100 at par. Flotation cost is 5% of the issue price. Ignoring…
- Kaveri Foods Ltd has 12% irredeemable debentures of ₹1,000 each issued at par, with no issue cost. The tax rate is 25%. What is the after-ta…
- Kaveri Ltd has 12% debentures of ₹1,000 face value, issued at par, redeemable at par after 5 years, with a tax rate of 25%. Using the approx…