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How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of ...
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Numericals with solutions of Net income Approach

Net income approach questions and answers:   Questions:  Find out the value of the firm with the help of given information: Particulars Amount Earnings before interest and tax 3, 50, 000 Cost of equity 10% Cost of debt 7.2% Debenture 1,00,000 Find out the overall cost of capital with the help of net income approach. (Assume tax rate-10%) Solution: Particulars Amount Earnings before interest and tax 3, 50, 000 Less: Interest @7.2% 7, 200 Earnings before tax 3, 42, 800 Less: Tax@10% 34, 280 Net income 3, 08, 520 Cost of equity 10% Market value of equity (S =net income/ cost of equity) 30, 85, 200 Market value of debt (B) 1, 00, 000 Value of the firm (S+B) 31, 85, 200 Questions:  Find out the overall cost of capital if the equity capitalisation rate is 12...
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What is Working Capital Leverage (WCL)?

Working capital leverage: It shows the sensitivity of the return on investment with change in current assets. As we all know the working capital is difference between current assets and current liabilities. And the working capital is use for meeting day to day capital requirements in business operations. With the help of working capital leverage we will find out how productivity or profitability of a business is affected by change in current assets. Formula: Working Capital Leverage (WCL) = % ∆ ROE / % ∆ CA Or If % decreases in current assets: WCL= CA / TA - ∆ CA If % increases in current assets: WCL = CA / TA + ∆ CA Where, CA = current assets TA = total assets ROE = return of capital employed or return on investment ∆ CA = change in current assets Example: Company A total assets are Rs. 17, 60, 800 and the current assets are Rs. 6, 00,000. The fixed assets are Rs. 11, 60, 800. Find out the working capital leverage if the current asset increases by 15...
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