# Cost of Preference Share Capital (Kp)
## Key characteristics
- Preference shareholders are paid dividend at a specified rate on the face value of preference shares.
- This dividend is NOT charged as an expense — it is an appropriation of after-tax profit.
- Therefore, preference dividend does NOT reduce the company's tax liability (no tax shield, unlike debenture interest).
- Like debentures, preference capital can be redeemable or irredeemable.
> Because there is no tax deductibility, the ₹(1 − t)₹ adjustment used for debt does not appear in Kp formulas — the dividend cost is borne in full.
## Classification
```
Cost of Preference Share Capital
├── Cost of Irredeemable Preference Shares
└── Cost of Redeemable Preference Shares
```
### Cost of Irredeemable Preference Shares
Preference shares never redeemed; cost is the perpetual dividend relative to net proceeds:
```
Kp = PD / NP
```
Where `PD₹ = annual preference dividend, `NP₹ = net proceeds (issue price − flotation cost).
### Cost of Redeemable Preference Shares
Analogous to redeemable debentures, but without the tax adjustment. Using the approximation method:
```
PD + (RV − NP)/n
Kp = ─────────────────────
(RV + NP)/2
```
Where `PD₹ = annual preference dividend, `RV₹ = redemption value, `NP₹ = net proceeds, `n₹ = remaining life. (The YTM/IRR method may also be used by discounting the dividend and redemption cash flows.)
> Contrast with Kd: The structure mirrors the debenture formulas exactly, except no ₹(1 − t)₹ term — preference dividends carry no tax shield.