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
Determine about the Zero Interest Bonds (ZIBs) Very much alike DDBs, only crucial difference is that these are issued at face values (DDBs are issued at a discount to face valu

When an investor invests in fixed income securities, he receives returns from one or more of the following sources: Coupon Interest payment.

Q. Show Social and Regulatory Factors? Regulatory climate and legislation against the environmental degradation may impair the profitability of the industry. Price control, vol

How does continuous compounding benefit an investor? The effect of enhancing the number of compounding periods per year is to increase the future value of the investment.  The

mini-case chapter 15:payout policy Megginson, Smart, Graham

SUPERVALU INC . , a large US retail grocer, had $36.1 billion in sales for its fiscal year ended February 25, 2011. SUPERVALU currently reports using US GAAP. The controller of

RWE Enterprises is a small manufacturer in Adelaide South Australia, feed suppliments for cattle. New production line NPV, Payback period and discounted payback period

how can management use financial ratios

What to do to maximise profits of the company If you want to maximise profits, there are only two methods to do it. Either you decrease your expenses (also known as costs) or y

Compounded Value of a Series of Cash Flows: - We have considered merely single payment made once as well as its accumulation effect. An investor possibly interested in investing mo