Calculation of Cost of Preference Capital

1. Number of Preference Shares issued = 10,000


2. Face Value of each Preference Share = Rs. 10


3. Discount on each Preference Share = 2%


4. Issue Price of each Preference Share = Face Value - Discount = Rs. 10 - (2% of Rs. 10) = Rs. 9.80


5. Total Amount raised through Preference Shares = Number of Shares issued x Issue Price = 10,000 x Rs. 9.80 = Rs. 98,000


6. Cost of Issue per Share = Rs. 0.20


7. Total Cost of Issue = Number of Shares issued x Cost of Issue per Share = 10,000 x Rs. 0.20 = Rs. 2,000


8. Total Cost of Preference Capital = Total Amount raised through Preference Shares + Total Cost of Issue = Rs. 98,000 + Rs. 2,000 = Rs. 1,00,000

Explanation

Preference shares are a type of equity shares that provide a fixed rate of return to the investors in the form of dividends. The dividend rate on preference shares is fixed at the time of issuance and is usually higher than the dividend rate on equity shares. Preference shares are also given preference over equity shares in the payment of dividends and in the event of liquidation of the company.

In the given scenario, XYZ limited has issued 10,000 preference shares of Rs. 10 each at a discount of 2%. This means that the investors will get a discount of 2% on the face value of the shares, and they will have to pay only Rs. 9.80 per share.

The cost of issue per share is the cost incurred by the company in issuing the shares, such as underwriting fees, legal expenses, printing charges, etc. In this case, the cost of issue per share is Rs. 0.20.

The total amount raised through preference shares is calculated by multiplying the number of shares issued by the issue price per share. The total cost of issue is the product of the number of shares issued and the cost of issue per share.

Finally, the cost of preference capital is the sum of the total amount raised through preference shares and the total cost of issue. In this case, the cost of preference capital is Rs. 1,00,000.

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