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An 8% irredeemable $0.50 preference share is being traded for $0.30 cum-div currently in a company that
pays corporation tax at a rate of 30%.
What is the cost of capital for these preference shares?
10.8%
15.4%
26.7%
18.7%Sir I don’t understand the question can you explain please I am not getting sir
I am surprised that you don’t understand the question – cost of capital calculations are always asked in the exam.
Have you not watched my free lectures on cost of capital? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.The dividend each year is 8% x 0.50 = 0.04.
Therefore the cost is 0.04 / (0.30 – 0.04) = 15.4%
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