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    Sweta Yadav
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    This document outlines topics related to cost of capital, including the concept of cost of capital, cost of debt, cost of preference shares, cost of equity, cost of retained earnings, and weighted average cost of capital. It then provides 8 problems related to calculating these various costs of capital using financial information from sample companies. The problems cover calculating after-tax cost of debt, cost of redeemable debt, cost of preference shares, cost of equity, weighted average cost of capital using book values and market values, and analyzing earnings per share and financial break-even points for alternative financing plans.

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    This document outlines topics related to cost of capital, including the concept of cost of capital, cost of debt, cost of preference shares, cost of equity, cost of retained earnings, and weighted average cost of capital. It then provides 8 problems related to calculating these various costs of capital using financial information from sample companies. The problems cover calculating after-tax cost of debt, cost of redeemable debt, cost of preference shares, cost of equity, weighted average cost of capital using book values and market values, and analyzing earnings per share and financial break-even points for alternative financing plans.

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    39 views2 pages

    Unit 4

    Uploaded by

    Sweta Yadav
    This document outlines topics related to cost of capital, including the concept of cost of capital, cost of debt, cost of preference shares, cost of equity, cost of retained earnings, and weighted average cost of capital. It then provides 8 problems related to calculating these various costs of capital using financial information from sample companies. The problems cover calculating after-tax cost of debt, cost of redeemable debt, cost of preference shares, cost of equity, weighted average cost of capital using book values and market values, and analyzing earnings per share and financial break-even points for alternative financing plans.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 2

    Unit – 4 Cost of Capital

    Coverage:

    1. Concept of Cost of Capital


    2. Cost of Debt (Kd)
    3. Cost of Preference (Kp)
    4. Cost of Equity (Ke)
    5. Cost of Retained Earnings (Kr)
    6. Overall Cost of Capital (Ko) (or) Weighted Average Cost of Capital (WACC)

    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

    Unit – 4 Cost of Capital


    Problems on EBIT – EPS analysis:

    1) A firm has a capital structure exclusively comprising of ordinary shares amounting to


    Rs10, 00,000. The firm now wishes to raise additional Rs 10, 00,000 for expansion. The firm has
    four alternative financial plans which are as follows.
    a. It can raise entire amount in the form of Equity Shares
    b. It can raise 50% as Equity capital and balance as 5% Debentures
    c. It can raise entire amount as 6% debentures
    d. It can raise 50% as equity capital and balance as 5% preference shares
    Further assume that the existing EBIT is Rs. 1, 20,000; the tax rate is 50%, outstanding
    ordinary shares 10,000 and the market price per share is Rs. 100 under all the four
    alternatives. Which Financing Plan should the firm select?

    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,

    Plan Equity Debt Preference shares


    s
    A 100% - -
    B 50% 50% -
    C 50% - 50%
    Cost of debt 8%. Cost of preference shares 8%. Tax rate 50%. Equity shares of the face
    value of Rs. 10 each will be issued at a premium of Rs 10 per share. Expected EBIT is Rs .80, 000.

    Determine for each plan,

     EPS
     Financial Break Even Point (FBP)
     Find out indifference point for various plans

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