CS Executive · Corporate Accounting and Financial Management · Capital Structure
Sunrise Textiles Ltd. has issued 12% irredeemable preference shares of face value Rs 100 each at par, with no issue costs. The company pays tax at 25%. What is the cost of this preference capital?
The cost is 12%. For irredeemable preference shares issued at par without costs, cost equals dividend divided by net proceeds, which is 12 over 100. Preference dividend is paid out of after-tax profits and gives no tax shield, so no tax adjustment is made.
- A9%
- B12%Correct
- C16%
- D10.5%
Explanation
Cost of irredeemable preference capital = Preference dividend / Net proceeds = 12/100 = 12%. Preference dividend is an appropriation of profit and not tax-deductible, so no tax adjustment is made. The 9% option wrongly applies a tax shield (12 x 0.75).
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