COST OF CAPITAL Homework Help

COST OF CAPITAL

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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.

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