Cost of Preference Shares

The cost of preference share (kp) is akin to kd. However, unlike interest payment on debt, dividend payable on preference shares is not tax deductible from the point of view assessing tax liability. On the contrary, tax (Dt) may be required to be paid on the payment of preference dividend. Irredeemable Preference Shares Redeemable Preference Shares

Irredeemable Preference Shares

The cost of preference shares in the case of irredeemable preference shares is based on dividends payable on them and the sale proceeds obtained by issuing such preference shares, P0 (1 f ). In terms of equation:
Kp kp P0 1 f Dp ( 8) (8 A )

Dp 1 D t P0 1 f

where kp Dp P0 f Dt

= Cost of preference capital = Constant annual dividend payment = Expected sales price of preference shares = Flotation costs as a percentage of sales price = Tax on preference dividend
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Redeemable Preference Shares

The cost of redeemable preference shares requiring lump sum repayment (P) is determined on the basis of the following equation:
D 1D t Pn P0 1f p t 1k p n 1 t1 k p In the case of repayment requiredin instalments: n D 1 D t P P0 1f p t t t 1k p 1 t1 k p
n

(9)

where P0 f Dp Pn

= Expected sale price of preference shares = Floatation cost as percentage of P0 = Dividends paid on preference shares = Repayment of preference capital amount
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