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Dear Sir,
Why do we need to use effective interest rate to compute dividend payment if Question mentioned, say 8% redeemable preference share?
I know redeemable means this Preference Share holder would be classified as Debt but why used EIR?
Will Effective interest rate be lower than given rate 8% in market practise?Thank you.
No, never. And the effective interest rate determines the “true” cost of financing those preference shares. Calculate the true cost using effective interest rate, add it to the preference share obligation, deduct the amount paid (per your example 8%) and that gives you the carry forward obligation
Ok?
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