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NPP

318 Corporate Finance BRILLIANT’S

P = 9
d
NP = Par Value – Discount – Expenses of Issue = 100 – 5 – 3 = ` 92
9 100
K = = 9.78%
p 92

 Redeemable Preference Shares / arS>r‘o~b {à’$a|g eo¶g©

Illustration 4.1.13
Calculate the Cost of Preference Share: Y Ltd. issues preference shares of face value ` 100 each
carrying 14% dividend and it realizes ` 92 per share. The shares are repayable after 12 years at
par. Tax rate 50%.
{à’$a|g eo¶a H$s bmJV H$s JUZm H$s{OE… Y {b{‘Q>oS> 14% {S>{dS>|S> dmbo ’o$g d¡ë¶y ` 100 à˶oH$ Ho$ {à’$a|g
eo¶g© Omar H$aVr h¡ VWm ¶h ` 92 à{V eo¶a àmßV H$aVr h¡& eo¶g© EQ> nma 12 df© níMmV² nwZ… ^wJVmZ ¶mo½¶ h¢&
Solution:

 RV NP 
D  
 N 
Cost of preference capital (K ), K =
P P  RV NP 
 
 2 
Where,
D = Annual dividend payment i.e., ` 14
N = Number of years for redemption i.e., 12 years.
RV = Redeemable value of preference shares at the time of maturity ` 100.
NP = Sale out value of preference shares less discount and flotation expenses, i.e. ` 92.

 100 92 
14   
 12  14 0.67
K = = = 0.1528 or 15.28%
P  100 92  96
 
 2 
COST OF EQUITY / Bp³dQ>r H$s H$m°ñQ>

Illustration 4.1.14
The equity shares of Mahindra Ltd. are traded in the market at ` 90 each. The current year
dividend per share is ` 18. The subsequent growth in dividends is expected at the rate of 6%.
Calculate the cost of equity capital.
‘qhÐm {b{‘Q>oS> Ho$ Bp³dQ>r eo¶a ~mOma ‘| ` 90 à{V na ~oMo J¶o& à{V eo¶a dV©‘mZ df© H$m {S>{dS>|S> ` 18 h¡&
{S>{dS>|S²>g ‘| AmJo H$s d¥{Õ 6% H$s Xa na Anojm H$s J¶r h¡& Bp³dQ>r H¡${nQ>b H$s bmJV H$s JUZm H$s{OE&