## Cost of Irredeemable Preference Shares

Irredeemable (perpetual) preference shares pay a fixed dividend forever and are never repaid. Like irredeemable debentures, the cost formula is simply the dividend yield on net proceeds.

### Formula

```

Kp = D / NP

```

Where:

`D` = Annual preference dividend = Dividend rate × Face value
`NP` = Net proceeds = Issue price − Flotation costs

### Important: No tax adjustment for preference dividends

Unlike interest on debentures, preference dividends are NOT tax-deductible. They are paid from after-tax profits. Therefore, no (1−t) adjustment is made.

### Floatation cost adjustment

If shares are issued at a discount or with issue costs:

```

NP = Issue price − Flotation costs

```

Worked example

### Example 1

Q10 – Reliance Energy Preferred Stock

Issue price = ₹100, Dividend = ₹12, Flotation = 3%

NP = 100 × (1 − 0.03) = ₹97

Kp = 12/97 = 12.37%

### Example 2

Q11 – XYZ & Co. 10% Preference Shares

Face value = ₹100, Dividend = 10% × 100 = ₹10

Issued at ₹95 (at a discount)

NP = ₹95 (no other flotation cost mentioned)

Kp = 10/95 = 10.53%

⚠️ Common exam mistakes

Applying a tax adjustment (1−t) to preference dividends — this is a common error borrowed from debenture questions. Preference dividends are post-tax.
Confusing the face value dividend rate with the yield on proceeds — always divide by NP, not face value.

Reference:

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