Page 317 - FM Integrated WorkBook STUDENT 2018-19

The cost of capital

Estimating the cost of preference

shares

D
k p = –––
P 0

k p = cost of the preference share

D = constant annual preference dividend

Pₒ = ex div market price of a share

N.B. The fixed preference share dividend is always based on the
nominal value of the share, which may vary.

Question 10

Cost of preference shares

Bishop Co has 100,000 18% preference shares in issue with a nominal value of
$0.50 each. The current ex div market value is $1.75.

Calculate the cost of the preference shares.

Kp = D/P 0

Kp = ($0.50 × 18%)/$1.75 = 0.051 or 5.1%

Illustrations and further practice

Now try TYU question 10 from Chapter 17.

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