CA Inter P6 · Chapter 4 · Question 3 of 10
9% preference shares of ₹ 100 each are issued with net proceeds of ₹ 92 per share and are redeemable at par after 10 years. Using the approximation formula, the cost of preference capital is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 10.21%
Explanation
Kp = [PD + (RV - NP)/n] / [(RV + NP)/2] = [9 + (100 - 92)/10] / [(100 + 92)/2] = 9.80 / 96 = 10.21%. No tax adjustment is made because preference dividend is not tax-deductible. The figure 9.78% would apply to irredeemable preference shares.
More Cost of Capital MCQs
- Q5The risk-free rate is 6%, the expected market return is 13% and the beta of Tejas Ltd's equity shares is 1.3. Using CAPM, the cost of…
- Q6The market price of an equity share is ₹ 60, the expected dividend next year (D1) is ₹ 3 and dividends are expected to grow at 7% per…
- Q7The capital structure of Dhruv Ltd (book values) is: equity share capital ₹ 30 lakh (cost 15%), 12% preference share capital ₹ 10 lakh and…
- Q8Kaveri Ltd has equity with a book value of ₹ 50 crore and a market value of ₹ 60 crore, and debentures with a book value of ₹ 50 crore and…
- Q9Debt is usually the cheapest source of long-term finance for a profitable company. The most important reason is that: