Cost of Irredeemable Preference Shares Calculator

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.

Preference Dividend per Share (d): Face Value per Share (Rs./P₀): Flotation Cost (%): Issue Condition:

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%)