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
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