ACCA F9 - cost of preference shares

sama

Hi,

I'm studying on my own for the F9 exam and doing as many past exam questions as I can. So far it all makes sense except one thing. According to explanations the cost of preference shares for WACC calculations
Kpr = dividends / share price
My problem is that I thought preference share dividends are taxed. So why don't we decrease the dividends then by the tax? Surely we should treat this as loan interest in the costs of debt calculations. Those are decreased by the tax in the IRR calculation.

Could anyone please shed some light on this?

Thanks,
Sara

KernowAccountant

sama wrote: »

Hi, I'm studying on my own for the F9 exam and doing as many past exam questions as I can. So far it all makes sense except one thing. According to explanations the cost of preference shares for WACC calculations Kpr = dividends / share price My problem is that I thought preference share dividends are taxed. So why don't we decrease the dividends then by the tax? Surely we should treat this as loan interest in the costs of debt calculations. Those are decreased by the tax in the IRR calculation. Could anyone please shed some light on this? Thanks, Sara

They're taxed on the recipient but not deductible for the paying company, unlike loan interest which does provide a tax shield for the company.

sama

Thank for the explanation, that makes perfect sense then.