Question

question 2
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a redeemable preference share pays an annual dividend of r12 and sells for r100, with 5% flotation costs. what is the cost of preference equity?
a. 12.6%
b. 11.4%
c 13.0%
d. 12.0%
clear my choice

Explanation:

Step1: Calculate the net - proceeds

The share sells for R100 and has 5% flotation costs. The net - proceeds per share ($P_0$) is calculated as $P_0=100\times(1 - 0.05)=100\times0.95 = 95$.

Step2: Use the formula for cost of preference equity

The formula for the cost of preference equity ($r_p$) is $r_p=\frac{D}{P_0}$, where $D$ is the annual dividend. Given $D = 12$ and $P_0=95$. Then $r_p=\frac{12}{95}\approx0.1263$ or 12.63% $\approx$ 12.6%.

Answer:

A. 12.6%