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The cost of ccapital

Esttimatinng thee cost of preeference

shaares

D
k p == –––
P 0

k p == cost of the preference share

D = constant aannual preeference dividend

Pₒ == ex div maarket price of a sharee

N.B. The fixedd preferencce share dividend is aalways bassed on thee
nomminal valuee of the shaare, which may vary.

Quuestionn 10

Cost of preferrence shares

Bishhop Co hass 100,000 118% preferrence sharres in issuee with a noominal valuue of
$0.550 each. TThe currentt ex div maarket value is $1.75.

Calcculate the ccost of the preferencee shares.

Kp == D/P 0

Ke == ($0.50 × 18%)/$1.775 = 0.051 or 5.1%

Illuustratioons annd furrther ppracticce

Noww try TYU qquestion 100 from Chaapter 17.

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