Overview: Preference shares pay a fixed dividend in perpetuity. Their cost of capital (Kₚᵣₑf) is calculated as the dividend yield adjusted for any flotation costs.
The basic formula is:
Kₚᵣₑf = d / (P × (1 - F))
where:
- d = annual dividend per share (often a percentage of the face value)
- P = issue price, which depends on the issue condition (e.g., at par, premium, or discount)
- F = flotation cost percentage (expressed as a decimal)
The result is expressed both in actual (decimal) form and as a percentage.
Result
Your result will appear here.
How It Works?
The tool computes the cost of preference share capital using the following steps:
- Determine the issue price based on the selected condition:
- At Par: Issue price = Face Value
- 10% Premium: Issue price = Face Value × 1.10
- 5% Discount: Issue price = Face Value × 0.95
- Adjust the issue price for flotation costs: Net Proceeds = Issue Price × (1 - Flotation Cost/100).
- Compute Kₚᵣₑf as: Kₚᵣₑf = d / Net Proceeds.
- The result is displayed in both actual (decimal) form (e.g., 0.1053) and as a percentage (e.g., 10.53%).
About Cost of Preference Shares
Preference shares are a hybrid form of financing—they pay a fixed dividend similar to bonds but represent equity. Their cost of capital is an important component when calculating a company’s Weighted Average Cost of Capital (WACC), and it reflects the return required by preference shareholders.
Since the dividends are paid in perpetuity and are not tax-deductible, the cost is simply the dividend yield adjusted for any flotation costs incurred during the issue process.
Example Calculation
Consider the following example:
A company issues 10% preference shares of face value Rs.100 each. The annual dividend is therefore Rs.10. Flotation costs are estimated at 5% of the expected sale price.
Scenario (i) – Issued at Par:
Issue Price = Rs.100
Net Proceeds = 100 × (1 - 0.05) = Rs.95
Kₚᵣₑf = 10 / 95 ≈ 0.1053 (or 10.53%)
Scenario (ii) – Issued at 10% Premium:
Issue Price = 100 × 1.10 = Rs.110
Net Proceeds = 110 × (1 - 0.05) = Rs.104.50
Kₚᵣₑf = 10 / 104.50 ≈ 0.0957 (or 9.57%)
Scenario (iii) – Issued at 5% Discount:
Issue Price = 100 × 0.95 = Rs.95
Net Proceeds = 95 × (1 - 0.05) = Rs.90.25
Kₚᵣₑf = 10 / 90.25 ≈ 0.1108 (or 11.08%)
| Feature | Details |
|---|---|
| Price | Free |
| Rendering | Client-Side Rendering |
| Language | JavaScript |
| Paywall | No |
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