COST OF CAPITAL
The computation of the cost of preference share” (kl is Akihito the cost of debt. The stipulate~ coupon rate of dividend on reference hares, like the interest on debt, constitutes the basis for the calculation of the cost. of preference shares. However, unlike payments on debt,
dividends payable on preference shares .are not tax-deductible. Therefore, no adjustment is ·required for taxes while computing the cost of preference shares. In view of the non-availability of tax shields on divide~ds paid, It” is nigher than It The explicit cost of preference shares is the discount rate that equates the net proceeds of the sale of preference hares with the present value of the future preference dividends and principal repayments. The appropriate formula for determining k” is given by Equation 36.3.