Calculating the Cost of Preference Shares

This question requires calculating the cost of preference shares issued by ABC Ltd. The cost of preference shares represents the effective rate of return required by preference shareholders.

Understanding the Key Information

• Preference Dividend Rate: 10% per annum.
• Face Value per Share: ₹100.
• Issue Price per Share: ₹95. (This is also the net proceeds per share, assuming no issue costs).
• The number of shares (2,000) is not needed for calculating the cost per share.

Formula for Cost of Preference Shares

The cost of preference shares (Kp) is calculated using the following formula:

$Kp = (Annual Preference Dividend / Net Proceeds per Share) * 100$

In LaTeX:

$K_p = \frac{\text{Annual Preference Dividend}}{\text{Net Proceeds per Share}} \times 100\%$

Step-by-Step Calculation

1. Calculate Annual Preference Dividend per Share:

   The dividend rate is 10% of the face value.

   Annual Preference Dividend = 10% of ₹100

   $\text{Annual Preference Dividend} = 0.10 \times 100 = ₹10$

2. Determine Net Proceeds per Share:

   Since the shares were issued at ₹95 and no issue costs are mentioned, the net proceeds per share are equal to the issue price.

   $\text{Net Proceeds per Share} = ₹95$

3. Calculate the Cost of Preference Shares (Kp):

   Using the formula:

   $K_p = \frac{₹10}{₹95} \times 100\%$

   $K_p = 0.105263 \times 100\%$

   $K_p \approx 10.53\%$

Conclusion

The cost of preference shares for ABC Ltd. is approximately 10.53%.