Cost of preference shares

Cost of preference shares is the return a company must offer preference shareholders, equal to the fixed dividend divided by the share's market price or net issue proceeds.

ByHoang TruongUpdated July 11, 2026

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A preference share pays a fixed annual dividend of €4.50 and trades at €60. Treated as a perpetuity, the cost of preference shares is Kp = €4.50 ÷ €60 = 0.075, or 7.5%. Unlike debt interest, the preference dividend carries no tax shield, since it is paid out of after-tax profit.

Where it fits

TopicCost of Capital & WACCCoreSubjectCorporate FinanceCoreTopicBond & Equity ValuationCore

The formula

LaTeX

K_p = \frac{D_p}{P_0}

Variables

$K_{p}$: Cost of preference shares (decimal)
$D_{p}$: Fixed annual preference dividend per share (€)
$P_{0}$: Market price per preference share (or net proceeds per share if newly issued) (€)

The return a company must offer preference shareholders, treating the fixed preference dividend as a perpetuity relative to the share's price.

Check yourself

PracticeCORE

A company issues new preference shares with a €7 fixed annual dividend per share. The shares are issued at a market price of €80, but flotation (issue) costs are €5 per share. The company's tax rate is 25%. What is the cost of these newly issued preference shares?

Select an answer to check your understanding.