Since part of preference dividends received by a corporation is excluded from taxable income, the component cost of equity for a company which pays half of its earnings out as ordinary dividends and half as preference dividends should, theoretically, be
Cost of equity = rs(0.30)(0.50) + rs(1 - T)(0.70)(0.50).

Question

Quizplus · Accepted Answer

The formula provided is incorrect for calculating the cost of equity. The cost of equity is typically calculated using models like the Capital Asset Pricing Model (CAPM) or the Dividend Discount Model (DDM), and it does not involve preference dividends or tax adjustments in the manner described.

Since Part of Preference Dividends Received by a Corporation Is