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    Cost of Capital

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    Mr. Pravar Mathur Student, Jaipuria Lucknow
    The document provides information on calculating the cost of capital from different capital sources, including preference shares, equity shares, debt, and retained earnings. It also provides sample capital structures and asks to calculate weighted average cost of capital (WACC) using both book and market value weights. Cost of capital is needed to evaluate long-term investment projects. WACC is calculated based on the costs of different sources of capital weighted by their proportions in the total capital structure.

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    Cost of Capital

    Uploaded by

    Mr. Pravar Mathur Student, Jaipuria Lucknow
    37 views3 pages
    The document provides information on calculating the cost of capital from different capital sources, including preference shares, equity shares, debt, and retained earnings. It also provides sample capital structures and asks to calculate weighted average cost of capital (WACC) using both book and market value weights. Cost of capital is needed to evaluate long-term investment projects. WACC is calculated based on the costs of different sources of capital weighted by their proportions in the total capital structure.

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    Cost of Capital (1)

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    The document provides information on calculating the cost of capital from different capital sources, including preference shares, equity shares, debt, and retained earnings. It also provides sample capital structures and asks to calculate weighted average cost of capital (WACC) using both book and market value weights. Cost of capital is needed to evaluate long-term investment projects. WACC is calculated based on the costs of different sources of capital weighted by their proportions in the total capital structure.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    37 views3 pages

    Cost of Capital

    Uploaded by

    Mr. Pravar Mathur Student, Jaipuria Lucknow
    The document provides information on calculating the cost of capital from different capital sources, including preference shares, equity shares, debt, and retained earnings. It also provides sample capital structures and asks to calculate weighted average cost of capital (WACC) using both book and market value weights. Cost of capital is needed to evaluate long-term investment projects. WACC is calculated based on the costs of different sources of capital weighted by their proportions in the total capital structure.

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    Cost of Capital

    Q.1) Calculate the Cost of Capital from the following cases:


    (i) 10-year 14% Preference shares of Rs 100, redeemable at premium of 5% and flotation costs
    5%.
    (ii) An equity share selling at Rs 50 and paying a dividend of Rs 6 per share, which is expected
    to continue indefinitely.
    (iii) The above equity share if dividends are expected to grow at the rate of 5%.
    (iv) An equity share of a company is selling at Rs 120 per share. The earnings per share is Rs 20
    of which 50% is paid in dividends. The shareholders expect the company to earn a constant after
    tax rate of 10% on its investment of retained earnings.

    Q.2) From the following information, determine the appropriate weighted average cost of capital,
    relevant for evaluating long-term investment projects of the company.
    Cost of equity 0.18
    After tax cost of long- 0.08
    term debt
    After tax cost of 0.09
    short-term debt
    Cost of Reserve 0.15

    Sources of Book Value Rs Market Value


    capital (BV) Rs (MV)
    Equity Capital `3,00,000 ` 7,50,000
    Reserve 2,00,000 -
    Long-term debt 4,00,000 3,75,000
    Short-term debt 1,00,000 1,00,000

    Q.3) Determine the weighted average cost of capital using (i) book value weights; and (ii) market
    value weights based on the following information:

    Book value structure: `


    Debentures (Rs 100 per 8,00,000
    debenture)
    Preference share (Rs100 2,00,000
    per share)
    Equity shares (Rs 10 per 10,00,000
    share)
    20,00,000

    Recent market prices of all these securities are:


    Debentures: Rs 110 per debenture;
    Preference share: Rs 120 per share; and
    Equity shares: Rs 22 per share
    External financing opportunities are:
    a. Rs 100 per debenture redeemable at par, 10 year maturity, 13% coupon rate, 4% flotation cost
    and sale price Rs 100;
    b. Rs 100 per preference share redeemable at par, 10 year maturity, 14% dividend rate, 5%
    flotation cost and sale price Rs 100; and
    c. Equity share – Rs 2 per share flotation costs and sale price Rs 22 Dividend expected on
    equity share at the end of the year is Rs 2 per share; anticipated growth rate in dividend is 7%.
    Company pays all its earnings in the form of dividends. Corporate tax rate is 50%.

    Q.4) The present capital structure of a company is as follows:

    Amount in Millions
    Equity share (Face value = 10) 240
    Reserves 360
    11% Preference Shares (Face value = Rs.10) 120
    12% Debentures 120
    14% Term Loans 360
    1,200

    Additionally the following information is available:

    Company’s equity beta 1.06


    Yield on long-term treasury bonds 10%
    Stock market risk premium 6%
    Current ex-dividend equity share price Rs 15
    Current ex-dividend preference share Rs 12
    price
    Current ex-interest debenture market Rs 102.50 per Rs 100
    value
    Corporate tax rate 40%

    The debentures are redeemable after 3 years and interest is paid annually. Ignoring flotation
    costs, calculate the company’ weighted average cost of capita (WACC).

    Q.5) Alok Industries has the following capital structure

    Rs ( Crores)
    Book Market
    Value Value
    Ordinary Shares 20 50
    Reserves 10
    Preference Shares 10 15
    Debt 60 45

    The tax rate is 30%

    a) The firm’s debenture has face Value Rs 100 Coupen rate 13% and floatation cost is 3% and will
    be redeemed after 10 years at premium of 5%
    b) Rs 100 preference Shares with 11% dividend rate and will be redeemed at par after 10 years
    c) The ordinary shares of the firm is selling for Rs 180 and the firm is expected to pay a dividend of
    Rs 15 and the dividend payment would grow at rate of 5%

    Calculate WACC using both book value and market value method

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