ACCA FM · Chapter 11 · Question 9 of 11
A company has 7% irredeemable preference shares with a nominal value of $1, currently quoted at $0.875 ex div. What is the cost of the preference shares?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 8.0%
Explanation
Kp = preference dividend / ex-div market price = $0.07 / $0.875 = 8.0%. Preference dividends are paid out of post-tax profits, so no adjustment for tax is made. 7.0% is the coupon rate on nominal value, and 5.6% wrongly deducts tax relief at 20%.
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