Evaluate cost of preference share capital, Financial Management

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Q. Evaluate Cost of Preference Share Capital?

Cost of Preference Share Capital: - A fixed rate of dividend is to be paid on preference shares. However unlike debt the dividend is to be paid at the discretion of the Board of Directors and there is no legal binding to pay the dividend.

Preference Shares may moreover be irredeemable or redeemable after a certain period.

(i) Cost of Irredeemable Preference Share Capital: - Formula for computing cost of Irredeemable Preference Share Capital is:

KP = D/NP  X 100

K = Cost of Irredeemable Preference Share Capital P

D = Annual Preference Dividend

NP = Net Proceeds of Preference Share Capital


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