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International Institute For Special Education (IISE) : Presentation On Cost of Preference Shares

This presentation discusses the cost of preference shares. It defines preference shares as shares that carry the right to receive dividends at a stipulated rate before common shareholders, and the right to receive repayment of capital before common shareholders if the company is liquidated. It then discusses different types of preference shares and how to calculate the cost of preference shares (Kp), whether the shares are redeemable or irredeemable. It provides examples to demonstrate how to calculate Kp in different scenarios.

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Pravah Shukla
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366 views11 pages

International Institute For Special Education (IISE) : Presentation On Cost of Preference Shares

This presentation discusses the cost of preference shares. It defines preference shares as shares that carry the right to receive dividends at a stipulated rate before common shareholders, and the right to receive repayment of capital before common shareholders if the company is liquidated. It then discusses different types of preference shares and how to calculate the cost of preference shares (Kp), whether the shares are redeemable or irredeemable. It provides examples to demonstrate how to calculate Kp in different scenarios.

Uploaded by

Pravah Shukla
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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International Institute for Special Education (IISE)

Presentation on Cost of Preference Shares.

By,
Ravi Srivastava
Financial Management:
Meaning

It simply explains the management of the Finance.


Two basic principles involved in Financial Management
are :
(a)Procurement of Funds.
(b) Utilization of Funds.
i.e. how to arrange and utilize the finance.
Two types of funds are involved –
(a)Long term sources of funds, i.e. Equity Share Capital,
Preference Share Capital, Debentures, Term Loans etc.
(b)Short term sources of funds, i.e. Trade Credit , Bank
Credit, Commercial Papers, Factoring ,Short Term
Public Deposits etc.
Cost of Capital
The cost of capital is an important factor for
designing the capital structure of a firm. The
basic reasons for running a firm is to earn a
return at least equal to its cost of capital.
It comprises various parts, like Cost of Equity,
Cost of Debentures, Cost of Preference
Shares, Cost of Retained Earnings, etc.
A business should earn enough revenue to
meet its cost of capital and finance its growth.
Finance Manager should consider the cost
carefully while designing the capital structure.
Cost of Preference
Shares
Meaning of Preference Shares:
,
Preference Shares is one which carries the
following two rights:
(i) Right to receive dividend at a stipulated rate
before any dividend is paid to equity
shareholders,
(ii) Right to receive repayment of capital on
winding up of the company before the capital of
equity shareholders is returned.
Classification:
(i) Cumulative Preference Shares
(ii) Non-Cumulative Preference Shares
(iii) Participating Preference Shares
(iv) Non- Participating Preference Shares
(v) Convertible Preference Shares
(vi) Non- Convertible Preference Shares
(vii) Redeemable Preference Shares
(viii) Irredeemable Preference Shares
Cost of Preference Shares:
For preference shares, the dividend rate can be
considered as its cost as it is this amount which the
company wants to pay against preference shares.
If floatation cost occurs at the time of Issue and
Redemption, it will be substracted from RV or NP, as
the case may be.
Cost of Irredeemable Preference Shares -
 PD
 Kp = --------- x 100
 NP
 where, PD = Annual Preference Dividend.
 NP = Net Proceeds of issue of preference
shares.
Cost of Redeemable Preference
Shares:
If preference shares are redeemable after a fixed
period, then the cost of preference shares will be –

 PD + (RV – NP)/N
 Kp = ----------------------------- x 100
 (RV + NP) /2
where,
RV = Redemption value which is to be paid to the

 Preference Shareholders
NP = Net Proceed at the time of issue of Preference
 Shares
 N = Life or Redemption Period.
Q. 1 A co. issued 20,000 12%
Preference Shares of Rs. 100 each at
par. Calculate Kp.

Here –
PD = 12% of ( 20,000 x Rs. 100)
= 2,40,000
NP = 2,00,000
2,40,000
Kp = ------------------ x 100
 2,00,000

 = 12%
Shares of face value Rs. 100 each carrying
14% dividend and realize Rs. 92 per share.
The shares are repayable after 12 years at
par. Calculate Kp.
Here:
PD = 14
NP = 92
RV = 100
 14 + (100 – 92) / 12
 Kp = ----------------------------- x 100
 (100 + 92) / 2

 = 15.27%
Thank You

Regards

Ravi Srivastava

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