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Cost of Equity of preference share

This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.

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May 26, 2017 at 8:31 am #388172
lusan
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A 4% irredeemable $0.8 preference shares is being traded for $1.2 cum-div currently in company that pay corporation tax at rate of 20%.
May 26, 2017 at 10:15 am #388242
John Moffat
Keymaster
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So?
I assume you are wanting to calculate the cost of the preference shares. You calculate it in exactly the same way as you calculate the cost of equity (but of course the dividend growth rate is zero).
May 28, 2017 at 10:44 am #388544
lusan
Participant
- Topics: 32
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Ke=0.8/1.2-0.8
=2%
Is this okay?
May 28, 2017 at 10:51 am #388549
John Moffat
Keymaster
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No! (Why are you attempting questions for which you do have printed answers?! You should be using a Revision Kit from one of the ACCA approved publishers – they have answers and workings.)
The dividend is 4% x $0.80 = $0.032. It is not $0.80!!!
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