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.