Cost of Preference Capital is:
ATax-deductible like debt
BNot tax-deductible because preference dividend is paid out of post-tax profits
CAlways equal to cost of debt
DSame as cost of equity
Answer & Solution
Correct answer: B. Not tax-deductible because preference dividend is paid out of post-tax profits
1. Preference dividends are paid out of profit AFTER tax.
2. No tax shield is available on preference dividends.
3. Kp formula does NOT include (1 − t).
_Source: ICAI BoS CA Inter Paper 6A, Ch 4 "Cost of Capital", §6_