## Cost of Redeemable Preference Shares
Redeemable preference shares are repaid at the end of a specified period. The cost calculation mirrors that of redeemable debentures, except:
1. No tax adjustment — preference dividends are not tax-deductible
2. The redemption premium or discount still affects the cost
### Approximation Formula
```
Kp = [D + (RV − NP)/n] / [(RV + NP)/2]
```
Where:
- `D` = Annual preference dividend (face value × dividend rate)
- `RV` = Redemption value
- `NP` = Net proceeds at issue
- `n` = Years to redemption
### Net proceeds computation
```
NP = Issue price − Flotation cost per share
```
If issued at a premium:
```
NP = (Face value + Issue premium) − Flotation cost
```
### Redemption value
Most commonly at par, but sometimes at a premium. Redemption at premium → RV > Face value → higher cost.
### Example 1
Q12 – XYZ & Co. 10% Preference Shares, redeemable in 10 years
Face = ₹100, D = ₹10, NP = ₹95 (from Q11), RV = ₹100, n = 10
Kp = [10 + (100−95)/10] / [(100+95)/2]
= [10 + 0.50] / 97.50
= 10.50 / 97.50
= 10.77% (given as 10.7% in study material)
### Example 2
Q13 – 12% Redeemable Preference Shares with premiums
40,000 shares of ₹100 each
Issued at ₹5 premium → Issue price = ₹105
Floatation = ₹2 per share
NP = 105 − 2 = ₹103
Redeemable after 10 years at ₹10 premium
RV = 100 + 10 = ₹110
D = 12% × 100 = ₹12
Kp = [12 + (110−103)/10] / [(110+103)/2]
= [12 + 0.70] / 106.50
= 12.70 / 106.50
= 11.93%
### Example 3
Q14 – 15% Preference Shares, redeemable at 10% premium after 20 years
Face = ₹100, D = ₹15, RV = ₹110
Issue management expenses = ₹30,000 for 30,000 shares → ₹1 per share
| Scenario | Issue Price | NP | Kp |
|---|
| At par | 100 | 99 | [15+(110−99)/20] / [(110+99)/2] = 15.55/104.5 = 14.88% |
| 10% premium | 110 | 109 | [15+(110−109)/20] / [(110+109)/2] = 15.05/109.5 = 13.74% |
| 10% discount | 90 | 89 | [15+(110−89)/20] / [(110+89)/2] = 16.05/99.5 = 16.13% |