A firm has $2 million market value and it sells preference shares for $100 per share. If the annualdividend on the preference share is $8 and it trades at $90, what is the cost of preference share capital?

Question

Quizplus · Accepted Answer

Number of preference shares = Market value of firm / Price per preference share = $2,000,000 / $100 = 20,000
Total annual dividend on preference shares = 20,000 x $8 = $160,000
Cost of preference share capital = Annual dividend / Market value per preference share = $160,000 / ($90 x 20,000) = 8.89%

A Firm Has $2 Million Market Value and It Sells