Hello John,
"The cost of debt is usually lower than the cost of preference shares"
1. Could you please explain how the above statement is true?
-From you notes & lectures, I've understood that debt is effectively much cheaper than equity how is it lower than preference share.
Thanks
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Cost of Debt
5y ago#1Two reasons:
One is that if the company goes bankrupt them debt gets paid out before preference shares and so is that bit less risky.
The other reason (more importantly) is that the cost of debt is lower because debt is allowable for company tax whereas preference dividends are not allowable for company tax.
This is explained in the lectures.
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