Cost of Capital — OpenTuition Forums

MIMuhammad Irfan6y ago

Hi I have two questions: 1 - the formula for calculating the cost of irredeemable preference shares is: Kp = Do/Po is this formula is also used to calculate the redeemable preference shares or we have to use the IRR method as we use for redeemable loan notes/debentures? 2 - Which business valuation method is most commonly used by companies in real life? Thanks

John MoffatTutor6y ago#1

1. Yes - for redeemable preference shares we calculate the IRR. 2. It depends on the reason for the valuation. If the company is simply closing down then it will be an asset valuation. If (more likely in the exam) the company is being taken over, then it will be more likely based on the present value of future earnings.

MIMuhammad Irfan6y ago#2

Great, just one more thing that how do we determine the market value and redemption value of redeemable preference shares for calculating the IRR ?

John MoffatTutor6y ago#3

They would have to be given in the question! (If you have come across a question that does not give the information then say which one and I will explain why :-) )

MIMuhammad Irfan6y ago#4

Thanks alot!

John MoffatTutor6y ago#5

You are welcome :-)

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