CS Executive · Corporate Accounting and Financial Management · Cost of Capital
Verma Ltd has 12% irredeemable preference shares of ₹100 face value currently quoted in the market at ₹80. Ignoring issue costs, what is the cost of this preference capital based on current market price?
The cost is 15%. Annual dividend is ₹12 on face value, and the current market price is ₹80. Dividing the dividend by market price gives 15%, the return required by investors at the present price.
- A12%
- B10%
- C15%Correct
- D9.6%
Explanation
Dividend = 12% of 100 = ₹12. Kp = 12/80 = 15%. Using face value gives 12%, which ignores the market price; 9.6% wrongly multiplies 12% by 80%.
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