A firm has $3 million market value and it sells preference shares at $100 per share. If the annual dividend on the preference share is $9 and it trades at $95, what is the cost of preference share capital?

Question

Quizplus · Accepted Answer

To find the cost of preference share capital, we need to calculate the dividend yield which is the annual dividend divided by the market price of the share.

Dividend yield = (Annual dividend / Market price per share) x 100

Dividend yield = (9/95) x 100
Dividend yield = 9.47%

Therefore, the cost of preference share capital is 9.47%, which is closest to option B (9.47%).

A Firm Has $3 Million Market Value and It Sells