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Assignment On Cost of Capital

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Assignment On Cost of Capital

Uploaded by

ihajain898033
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Practice Questions on Cost of Capital

Q1. Following are the details regarding the capital structure of a company:-

Types of Capital Book Value Market Value Specific Cost


Debentures 40000 38000 5%
Preference Share 10000 11000 8%
Equity Share 60000 120000 13%
Retained Earning 20000 --------- 9%

You are required to calculate the WACC taking Book Value as weight and Market value as Weights.

Q2. The following is the information from the balance sheet of Fashions Ltd, as on 31.12.2021
(in Lacs)
Equity share Capital 400
12% Debentures 400
18% Term Loan 1200

(a) Determine the WACC of the company. It had been paying dividend at a consistent rate of 20%.
(b) What difference will it make if the current price of the Rs. 100 share is Rs. 160?
(c) Determine the effect of income tax on the cost of capital if the tax rate is 40%.

{ A. 17.20% B. 15.7% C. 10.42%}

Q3. The following is the information available from the balance sheet of a company?

Equity share capital 200000


Reserve and Surplus 130000
8% Term Loan 170000
The tax rate of the company is 50%. Current level of equity dividend is 12%. Calculate WACC using above
data. {9.28%}

Q4. An electric equipment manufacturing company wishes to determine the WACC for evaluating capital
budgeting projects. You have been supplied with the following information:-
Balance sheet
Liabilities Amt Assets Amt
Equity share capital 1200000 Fixed assets 2500000
Pref. share capital 450000 current assets 1500000
Retained Earning 450000
Debenture 900000
Current Liabilities 1000000
4000000 4000000

Additional information:
1. 20 years 14% debentures of Rs. 2500 face value, redeemable at 5% premium can be sold at par, 2%
flotation cost.
2. 15% Pref shares, sale price Rs. 100 per share, 2% flotation costs.
3. Equity share: sale price Rs. 115 per share, flotation cost, Rs. 5 per share.
The corporate tax rate is 55% and the expected growth in equity dividend is 8% per share. The expected
dividend at the end of the current financial year is Rs. 11 per share.

{ Kd=6.55%, Kp=15.30%, Ke=18%, Ko=14.15%}


Q5. The following information is provided in respect of the specific cost of capital of different source along
with the book value and the market value as weight.

Source Cost of Capital Book Value Market Value


Equity share capital 18% 0.50 0.58
Preference Share 15% 0.20 0.17
Long term debts 7% 0.30 0.25

Calculate the weighted average cost of capital, WACC, using both Book Value and Market Value.

{BV Ko= 14.1%, MV Ko 14.74%}

Q6. The shares of a company are being currently sold at Rs. 20 per share It has just paid a dividend of Rs. 2 for
the last year. The profits of the company are expected to show a growth of 10% p a, and he company
maintains a 100% payout ratio. Determine the cost of equity and what would be the expected current price of
the share if the growth rate is
(1) 8% (2) 12%
{ Ke=21%, Expected price would be Rs. 16.61, 24.88}

Q7. ABC ltd has the following capital structure:

4000 Equity share of rs. 100 each Rs. 400000


10% Pref Shares Rs. 100000
11% Debentures Rs. 500000

The current market price of the share is Rs. 102. The company is expected to declare a dividend of Rs. 10 at
the end of the current year, with an expected growth rate of 10%. The applicable tax rate is 50%.

(1) Find out the cost of equity and WACC, and


{ Ke=19.8%, WACC = 11.7%}

Q8. International food ltd has the following capital structure:-

Book Value Market Value


Equity capital (25000 shares of Rs. 10 Par) 250000 450000
Pref share capital (500 shares of Rs. 100 pare
carrying dividend of 13% 50000 45000
Reserve and Surplus 150000 …………………
Debentures (1500 Debentures of Rs. 100 par
carrying 14% intt.) 150000 145000

The expected dividend per share is Rs. 1.40 and the dividend per share is expected to grow at the rate of 8%
forever. Preference shares are redeemable after 58 years at par whereas debentures are redeemable after 6
years at par. Tax rate for the company is 50%.
You are required to compute WACC for the existing capital structure using market value and book value as
weights.

{ke=15.77%, kp=15.78%, kd= 7.68%, market value as weights= 13.93%}

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