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      Question

      The cost of preference share capital is considered

      higher than the cost of debt because:
      A Preference dividends are tax-deductible Correct Answer Incorrect Answer
      B Preference dividends are not tax-deductible Correct Answer Incorrect Answer
      C Preference shares have a higher claim on assets Correct Answer Incorrect Answer
      D Preference shares have voting rights Correct Answer Incorrect Answer
      E Preference shares are redeemable Correct Answer Incorrect Answer

      Solution

      Interest on debt is a tax-deductible expense, which lowers the effective cost of debt. In contrast, dividends on preference shares are paid out of after-tax profits; they are not tax-deductible. This makes the cost of preference capital higher than the cost of debt for the company.

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