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In Business / High School | 2025-07-08

A company issues 10% irredeemable preference shares. The face value per share is Shs. 100, but the issue price is Shs. 95. What is the cost of the preference share?

Asked by doodlean5081

Answer (1)

To calculate the cost of an irredeemable preference share, we need to understand what it means and how it is determined.
Irredeemable preference shares are a type of preference share that do not have a maturity date for repayment, meaning they provide a perpetual dividend. The cost of these shares to the company is essentially the dividend yield that the company pays on these shares.
Here's how you calculate the cost of the preference share:

Dividend Payment: Since the shares are 10% preference shares and the face value is Shs. 100, the annual dividend per share is calculated as: Dividend per share = Face Value × Dividend Rate = 100 × 0.10 = 10 Shs.

Issue Price: The preference shares are issued at Shs. 95.

Cost of Preference Share: The cost of the preference share is the dividend divided by the issue price of the share. This reflects the rate of return required by investors. Cost of Preference Share = Issue Price Dividend per share ​ = 95 10 ​
Simplifying that: Cost of Preference Share = 0.1053 or 10.53%


Therefore, the cost of the preference share to the company is 10.53%. This is the rate that the company pays to its preference shareholders based on the issue price of the preference shares.

Answered by EmmaGraceJohnson | 2025-07-22

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