Cost of preference capital, Financial Management

Cost of Preference capital (K )

The fixed rate of dividend payable to the Preference share holders is the cost of Preference capital.  Exactly, the cost of Preference capital is a function of dividend expected by its investors.

K = D /NP

Where, K = cost of Preference capital, D = Annual Preference dividend and NP =

Preference share capital ( Net proceeds).

Occasionally, when the issue of Preference shares involves a discount or a premium the proceeds are adjusted accordingly. When the Preference shares issued are redeemable in nature,

460_cost of preference capital.png

Where, K= cost of redeemable Preference capital, D = Annual Preference dividend, MV = Maturity value of Preference shares and NP = Net proceeds of Preference shares

Illustration:

 A Co. issues 10,000, 10% Preference shares of Rs.100 each.  Cost of issue is Rs.2 per share.  Calculate cost of Preference capital if these shares are issued (i) at par (ii) at a premium of 10% and (c) at a discount of 5%

Solution: K = D /NP

(a)When Preference shares are issued on par

183_cost of preference capital2.png

2225_cost of preference capital1.png

Posted Date: 10/16/2012 12:52:03 AM | Location : United States







Related Discussions:- Cost of preference capital, Assignment Help, Ask Question on Cost of preference capital, Get Answer, Expert's Help, Cost of preference capital Discussions

Write discussion on Cost of preference capital
Your posts are moderated
Related Questions
Modi Wires and Cable Ltd intends to finance its INR 20 million modernization plan for which it is trying to decide between debt and external equity. The management feels that the e

a) Globalisation refers to the interdependence and integration of economic, social and politic issues (services, goods, people and capital), across the world. For example, consumer

The Final Project for this module is a consultancy report to Anthony’s Orchard, an expanding apple orchard and distributor. The company has been entertaining the idea of expanding

What are the social and contemporary issues in financial management?

Q. What are assumptions of Walters dividend model? 1. Constant Return and Cost of Capital: - The Walter' model presume that the firm's rate of return and its cost of capital ar

Normally, floater coupon rate moves in the same direction as the reference rate. That is, with an increase in the reference rate, the floater coupon rate also increases

A paper mill produces two grades of paper viz., X and Y. Because of raw material restrictions, it cannot produce more than 400 tons of grade X paper and 300 tons of grade Y paper i

Explain how earnings available to common stockholders and common stock dividends paid from the current income statement affect the balance sheet item retained earnings. The cha

The process of valuing a callable bond is similar to that of an option-free bond, except for one thing - when the call option may be exercised b

Q. Show Maximum opportunity cost? If Marton hedges all its awaited dollar income over the next year at US$1.55: £l this will make guaranteed (ignoring other sources of risk) st