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Cost of Capital

This document contains three problems related to calculating the weighted average cost of capital for companies. The first problem provides the capital structure of Indrani Ltd and asks to calculate the WACC using book and market values as weights. The second problem gives additional details for X Ltd and asks to calculate the overall after-tax cost of additional finance. The third problem provides the capital structure of another company and asks to calculate the cost of each source of capital assuming corporate tax rate of 30% and dividend tax rate of 10%.

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86 views2 pages

Cost of Capital

This document contains three problems related to calculating the weighted average cost of capital for companies. The first problem provides the capital structure of Indrani Ltd and asks to calculate the WACC using book and market values as weights. The second problem gives additional details for X Ltd and asks to calculate the overall after-tax cost of additional finance. The third problem provides the capital structure of another company and asks to calculate the cost of each source of capital assuming corporate tax rate of 30% and dividend tax rate of 10%.

Uploaded by

Sundar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Guiding you today for a better Tomorrow Aaditya Gupta Classes

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Cost of Capital
1. Indrani Ltd. Has the following Capital Structure:

Rs. (in Lakhs)

Equity share capital (10 Lakh shares) 100


12% Preference share Capital(10,000 shares) 10
Retained earnings 120
14% debentures(70,000 Debentures) 70
14% term loan 100

400

The market price per equity share is Rs. 25. The next expected dividend per share is Rs. 2 and is
expected to grow at 8%. The preference shares are redeemable after 7 years at par and are
currently quoted as Rs. 75 per share. The Debentures are redeemableafter 6 years at parand
their current market quotation is Rs. 90 per debenture. The tax rate applicable to this firm is
50%.

You are required to compute weighted Average Cost of Capital of the Company using a)book
value
b) market value as weights.

2. X Ltd. Requires additional finance of Rs. 20 lakh for meeting the investment plans. It
has Rs. 4 lakh in the form of retained earnings available for investment purposes. The
following are the further details:
a. debt-equity mix 40:60
b. cost of debt: up toRs. 4,00,000, 10
%(before tax)Beyond Rs. 4,00,000
12%(before tax)
c. earnings per share, Rs.5
d. dividend pay-out, 60% of earnings
e. expected growth rate in dividend, 5%
f. current market price per share RS. 35
g. tax rate 35%
Compute the overall weighted average after tax cost of additional finance.

3. The capital structure of a company is given below:


Equity share capital (5,000 shares of Rs. 100 each) Rs. 5,00,000
10% preference share capital (2,000 shares of Rs.100 each) Rs. 2,00,000
12% debentures RS. 3,00,000

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Phone – 99035-03989

Rs. 10,00,000

Its operating profit is Rs. 2,90,000. The market price of each equity share is Rs. 250 and of
eachpreference share is Rs.125.
Find the cost of each source of capital assuming
a) Corporate tax to be 30% and
b) Corporate dividend tax to be 10%

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