Scribd Logo
Upload

Welcome to Scribd!

  • Problems On Cost of Capital

    Uploaded by

    766 Rutu Khadapkar
    25 views3 pages
    This document provides 14 problems related to calculating the cost of capital for companies. The problems cover calculating the after-tax cost of debt, cost of preferred equity, cost of common equity, weighted average cost of capital (WACC) using both book and market values, and accounting for factors like taxes, floatation costs, and dividend growth rates. The goal is to determine the rates of return required by a company's debt holders, preferred shareholders, and common shareholders to calculate its WACC.

    Original Description:

    Original Title

    Untitled

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    This document provides 14 problems related to calculating the cost of capital for companies. The problems cover calculating the after-tax cost of debt, cost of preferred equity, cost of common equity, weighted average cost of capital (WACC) using both book and market values, and accounting for factors like taxes, floatation costs, and dividend growth rates. The goal is to determine the rates of return required by a company's debt holders, preferred shareholders, and common shareholders to calculate its WACC.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    25 views3 pages

    Problems On Cost of Capital

    Uploaded by

    766 Rutu Khadapkar
    This document provides 14 problems related to calculating the cost of capital for companies. The problems cover calculating the after-tax cost of debt, cost of preferred equity, cost of common equity, weighted average cost of capital (WACC) using both book and market values, and accounting for factors like taxes, floatation costs, and dividend growth rates. The goal is to determine the rates of return required by a company's debt holders, preferred shareholders, and common shareholders to calculate its WACC.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    of 3

    Problems on Cost of Capital

    1. A Company has Rs. 5 million debt outstanding with a coupon rate of 12%. Currently, the yield
    to maturity on these bonds is 14%. If the firm’s tax rate is 40%. What is the Company’s after tax cost
    of debt?

    2. A Company’s Rs. 100 8% preferred stock is currently selling for Rs. 85. What is the
    company’s cost of preferred equity?

    3. The expected dividend is Rs. 2.50 per share of a stock priced at Rs. 25. What is the cost of
    equity if the long term growth in dividends is projected to be 8%?

    4. An analyst gathered the following data about a company:


    Capital Structure Required rate of return
    30% Debt 10% for debt
    20% preferred stock 11% for preferred stock
    50% common stock 18% for common stock
    Assuming a 40% tax rate, what after tax return must the company earn on its investments.

    5. A Company is planning a $50 million expansion. The expansion is o be financed by selling $20
    million in new debt, $30 million in new common stock. The before tax required rate of return
    is 9% for debt and 14% for equity. If the company is in the 40% tax bracket, what is the
    company’s marginal cost of capital?

    6. The following is the capital structure of ABC Co Ltd as on 31.3.2008

    Rs.
    Equity Shares : 10000 shares of Rs. 100 each 10,00,000
    10% preference shares of Rs. 100 each 4,00,000
    12% Debentures 6,00,000
    20,00,000
    The market price of the company’s share is Rs. 110 and the next expected dividend would be
    Rs.10 . The dividend growth rate is 6%.

    i) If the company is in the 50% bracket, compute the weighted average cost of capital
    ii) Assuming that in order to finance an expansion plan, the company intends to borrow a fund
    of Rs. 10 lakhs bearing 14% rate of interest, what will be the company’s revised weighted
    average cost of capital? This financing decision is expected to increase dividend from rs. 10
    to Rs. 12 per share. However, the market price of equity share is expected to decline from
    Rs. 110 to Rs. 105 per share. Calculate the revised weighted average cost of capital.

    (Ans: 11.35% ; 10.67%)


    7. XYZ Ltd has the following book value capital structure:

    Equity Capital ( in shares of Rs. 10 each fully paid up at par) Rs. 15 crores
    11% Preference Capital ( is shares of Rs. 100 each , fully paid up at par) Rs. 1 crore
    Retained earnings Rs. 20 crores
    13.5% debentures of Rs. 100 each Rs. 10 crores
    15% Term loans Rs. 12.5 crores
    The next expected dividend on equity shares per share is Rs. 3.60; the dividend per share is
    expected to grow at the rate of 7%. The market price per share is Rs. 40. Preference stock,
    redeemable at par after 10 years is currently selling at Rs. 75 per share. Debentures, redeemable at
    par after six years are selling at Rs. 80 per debenture. The income tax rate for the company is
    40% . The income tax rate for the company is 40%. Calculate the weighted average cost of capital
    using :

    a. Book value proportions;


    b. Market value proportions
    8. JKL Ltd. has the following book value capital structure as on 31st March 2015

    Equity Share Capital ( 2 lakh shares) Rs. 40 lakhs


    11.5% Preference Shares Rs. 10 lakhs
    10% Debentures Rs. 30 lakhs
    Total Rs. 80 lakhs
    The equity share of the company sells for Rs. 20. It is expected that the company will pay next
    year a dividend of Rs. 2 per share which is expected to grow at 5% p.a for ever. Assume a 35% tax
    rate. Required: Compute the WACC based on the existing capital structure.

    9. A company issues Rs. 10 lakh, 12% debentures of Rs. 100 each. The debentures are
    redeemable after the expiry of a fixed period of 7 years. The Company is in the 35% tax
    bracket. Calculate the after tax cost of debt is the debentures are issued;
    i. At par
    ii. 10% discount
    iii. 10% premium
    iv. If the brokerage is paid at 2% what will be the cost of debentures if the issue is at par?
    10. If Reliance Energy is issuing preferred stock at Rs. 100 per share, with a dividend of Rs. 12
    and a floatation cost of 3% what is the cost of preference share?
    11. XYZ Co. issues 2000 10% preference shares of Rs. 100 each at Rs. 95 each. Calculate the cost
    of preference shares?
    12. A Company has paid a dividend of Re 1 per share ( of face value of Rs. 10) last year and it is
    expected to grow @10% next year. Calculate the cost of equity if the market price per share is
    Rs. 55.
    13. Calculate the cost of equity capital of H Ltd whose risk free rate of return equals 10%. The
    firm’s beta equals 1.75 and the return on the market portfolio equals 15%.
    14. Calculate WACC using the following data by using a. Book value weights and b. Market value
    weights

    The capital structure is as under:

    Debentures ( Rs. 100 per debenture) Rs. 5,00,000


    Preference shares ( Rs. 100 per share) Rs. 5,00,000
    Equity shares (Rs. 10 per share) Rs. 10,00,000
    Rs. 20,00,000
    The market prices of these securities are:
    Debentures – Rs. 105 per debenture; Preference Rs. 110 per preference share; Equity Rs. 24.
    Additional information:
    a. Rs. 100 per debenture redeemable at par, 10% coupon rate, 4% floatation costs, 10 year
    maturity
    b. Rs. 100 per preference share redeemable at par, 5% coupon rate, 2% floatation costs and 10
    year maturity
    c. Equity shares has Rs. 4 floatation costs and market price of Rs. 24 per share.
    The next year dividend is Rs. 10 with an annual growth rate of 5%. The firm has a practice
    of paying all earnings in the form of dividends. Corporate tax is 50%.

    You might also like