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Unit 4
Unit 4
Coverage:
Problems:
1. A company has a 15% Perpetual Debts of Rs. 1lakhs and the tax rate is 35%. Determine the cost
of Debt after tax assuming that the Debt is issued, at par; at 10% discount and at 10% premium.
2. The Company issues new 15% Debentures of Rs. 1000 face value to be redeemed after 10 years.
The debenture is expected to be sold at 5% discount. It will also involve floatation costs of 2.5%.
The company’s tax rate is 35%. What is the cost of redeemable debt?
3. The company issues 14% Irredeemable Preference Shares of the face value of Rs. 100. Floatation
costs are expected to be 5%. What is the cost of capital if the Preference Shares are issued at par;
at 10% discount and at 10% premium?
4. ABC Ltd. Has issued 14% Preference Shares of the face value of RS. 100 to be redeemed after
10 years. Floatation costs are expected to be 5%. Determine the cost of capital.
5. Find out the cost of Equity if the MPS is Rs. 25 and the DPS is expected to be Rs. 1per share and
no dividend tax. Also find out the Ke if dividends are expected to be Rs. 1.5 per share ever year.
6. From the following calculate cost of Equity.
Current market price of the share is Rs. 150
Floatation cost per share Rs. 3
Dividends are growing @ 5%
Expected dividend on the new share at the end of the current year is Rs. 14.10 per share.
7. Calculate the Ko from the following information using the Book Value weights.
Kd 8%; Kp 14%; ke 17%
Source Rs
Debt 3,00,000
Preference 2,00,000
capital
Equity capital 5,00,000
8. From the following information determine the WACC based on Book Values and Market Values.
Cost of Equity 18%; after tax cost of long – term debts 8% and after tax cost of short – term debts
9%.
Source Book Value Market Value
Equity 5,00,000 7.50.000
Long – term debts 4,00,000 3,75,000
Short – term debts 1,00,000 1,00,000
10,00,000 12,25,000
Indifference Point:
A firm is considering the following three financing plans. The key information is as below.
The total investment to be raised Rs. 2, 00,000. The financing plans are,
EPS
Financial Break Even Point (FBP)
Find out indifference point for various plans