GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Rate of Dividend
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After Tax Rate of Dividend
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Discount Rate that equates PV of inflows and outflows relating to capital
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None of the above
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Detailed explanation-1: -The cost of preference shares is derived using a formula, which has also been provided. It is kpref = d ÷ P0 where: ■ kpref is the cost of preference shares. d is the annual preference dividend, which can be worked out as $1 × 7% = $0.07.
Detailed explanation-2: -The coupon rate paid by the company for these redeemable preference shares is 10%.
Detailed explanation-3: -From the perspective of the holders of Preference shares, it shall be noted that preference dividend received in excess of 10 lakhs is taxed at the rate of 10%. 115BBDA applies only when the dividend is in the nature of sec 2(22).
Detailed explanation-4: -The fixed rate of dividend on preference share is the starting point for calculation of cost of capital of preference share capital. As the preference shares may either be redeemable or irredeemable, the cost of capital may also be ascertained accordingly.