Cost of Preference Shares

COst of Preference Shares

Cost of Preference Shares

The computation of the cost of preference share 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  external 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 divided paid,  “t” is higher than Ltd.

The explicit cost of preference shares is the discount rate that equates the net proceeds of the sale of  reference shares with the present value of the future preference dividends and principal  repayments.

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