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how to calculate cost of capital of preference shares & convertible debt?
and does OT’s f9 lectures has this topic in it? if it has , please do share the link with me.
And how often do cost of capital of preference shares & convertible debt comes in f9 paper?
does it come at every attempt?cost of capital for preference shares=dividend amount per preference shareholders divided by market value of 1 preference shares
for the cost of convertible debt, you have 2 find the IRR of the following cashflows:
1)market value of convertible debt(outflow)
2)interest amount(inflow)
3)tax on interest(outflow)
4)higher of redemption value or conversion value(inflow)Mansi’s answer is correct.
For preference shares it is the normal cost of equity formula – it is simply that because preference shares have a fixed dividend therefore g = 0
For convertible debt it is the same as all redeemable debt – you need to calculate the IRR. The only difference is that you have first to decide what the investors expect to receive on redemption ( it will be there choice as to whether to take cash or shares).
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