Preference shares are like equity shares which are issued to different shareholders and promoters. The main characteristics of preference share are that the dividend payout rate is fixed. Preference shares can also be perpetual or redeemable. Here we will show about how to calculate the price of perpetual preference share capital which are not redeemable by the preference shareholders and continue to pay dividend for the entire holding period.
The formula to calculate cost of preference share capital is given below
Kp = D / [Po*(1-f)]
Kp = Cost of Preference share capital
D = Annual dividend to paid which is fixed
f = Floatation cost, which are spend in order to complete the preference share allotment transaction
For redeemable preference shares, Cost of preference share capital, Kp is calculated based on DCF approach by using current market price of preference shares, annual dividend, redemption period and redemption price. Here cost of preference share capital will be present value of all the future cash flows including all the dividends, redemption price etc.