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Definition: Cost of Preference Share Kp
The cost of capital that is incurred for the preference share capital includes the dividend that needs to be paid at the end of the financial year for the shares held by preference shareholders. It is generally calculated as follows:
If any kind of premium or discount or cost of floatation has been availed at the issue of share for preference shareholders, it should be deducted from the par value of the share capital. Then Kp is calculated as per the dividend incurred on the net proceed (NP) which is as follows:
NP= Preference share capital – Discount – Cost of Flotation
Now, cost of capital is calculated not directly on the preference share capital but on the net proceeds as follows:
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