PD = Annual preference dividend PO = Net proceeds in issue of preference shares Dt = Tax on preference dividend Illustration 6: X Ltd, issued 2,000 10% preference shares of Rs 100 each at Rs 95 each. Calculate the cost of preference shares. K-PD PO K = (10 x 2000) (95 x 2000) = 10 = 0.1053 = 10.53% 5.6.2 COST OF REDEEMABLE PREFERENCE SHARES: If the preference shares are redeemable after the expiry of a fixed 10 period the cost of preference shares would be: K.PD+ (RV-NPYN RV+NP Where. PD = Annual Preference Dividend RV = Redemption value of Preference Shares NP = Net proceeds on issue of Preference Shares N = Life of Preference Shares However, since dividend of preference shares is not allowed as deduction from income for e tax purposes, there is no question of tax advantage in the case of cost of preference shares. The cost of redeemable preference share could also be calculated as the discount rate that equates the net proceeds of the sale of preference shares with the present value of the future dividends and principal payments. Thus, in the case of debt as well as preference shares, cost of capital is calculated by reference to the obligations incurred and proceeds received illustration 7: Y Ltd. issued 2,000 10% preference shares of Rs 100 each at Rs 95 each. The company proposes to redeem the preference shares at the end of 10 years. Calculate the cost of preference shares