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cost of preference share capital and weighted average cost

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• 1. -By Akanksha Aishwarya Cost of preference capital and weighted average cost of capital
• 2. COST OF PREFERENCE SHARE CAPITAL
• 3. MEANING- Cost of preference share capital is that part of cost of capital in which we calculate the amount which is payable to preference shareholders in the form of dividend with fixed rate.
• 4. FORMULA- Cost of pref. share capital’s formula is - Cost of Pref. Share capital (Kp) = amount of preference dividend/ Preference share capital Kp = D/P
• 5. In adjustment case cost of pref. share capital will change and we can calculate it with following way- Kp = D/ NP D =Annual pref. dividend, NP = Net proceed = Par value of Pref. share capital – discount – cost of floatation Or NP = Par value of pref. share capital + Premium
• 6. At the time of maturity, we need to calculate cost of pref. share capital with following formula - Cost of redeemable pref. share capital -
• 7. D =Annual dividend MV = Maturity value of pref. shares NP = Net proceeds of pref. shares N= number of years
• 8. Suppose, we have to pay Rs. 10, 00,000 but at the time of issue of pref. share, we had paid Rs. 2 per issue of pref. share. So, net proceed is Rs. 9,80,000 but if this amount is payable after 10 years at 10% premium, this will also benefit to pref. share capital and total cost of pref. share capital will increase. Rate of dividend is 10%.
• 9. Cost of pref. share capital = D + (MV – NP )/n / ½(MV +NP) X 100 = 100,000 + ( 10,50,000- 9,80,000 )/ ½ ( 10,50,000 + 9,80,000) x 100 = 100,000 + 7,000/ 10, 15,000 X 100 = 10.54%
• 10. WEIGHTED AVERAGE COST OF CAPITAL
• 11. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. TheWACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere.
• 12. Companies raise money from a number of sources: common equity, preferred stock, straight debt, convertible debt, exchangeable debt, warrants, options, pension liabilities, executive stock options, governmental subsidies, and so on
• 13. formula- Businesses often discount cash flows atWACC to determine the Net PresentValue (NPV) of a project, using the formula- NPV = PresentValue (PV) of the Cash Flows discounted atWACC.
• 14. Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate
• 15. Thank you