International Financial

Management
M. Com.
Semester - IV
Question: 1.1

The Indian subsidiary of an American MNC has raised Rs 50 million to finance its
investment requirement by issuing 8-year, 12% debentures in Indian market. While
interest is to be paid annually, the debentures are to be redeemed at year-end 8, at
4% premium. Floatation cost are estimated at 2%. Assume that tax laws in India
allow full amortization of floatation costs in the first year itself, payment of
premium in the year in which it is paid and corporate tax of 35%. Determine the
effective cost of debt of the Indian subsidiary.
Solution:
8
𝐶𝑂𝐼𝑡 𝐶𝑂𝑃8
Cost of debt is determined by solving the following equation: 𝐶𝐼𝑂 = ෍ +
(1 + 𝐾𝑑 )𝑡 (1 + 𝐾𝑑 )8
𝑡=1
Where COI= Cash flow of interest in years 1-8, duly adjusted for tax advantage, Rs. (50 million x 0.12 x
0.65) = Rs. 3.9 million.

COP8 = Principal repayment in the year of maturity (t=8) [ Rs.50 million + 4% premium, i.e., Rs. 2 million
less tax advantage (Rs. 2 million x 0.35 ) = Rs. 0.70 million = Rs. 51.3 million.]

CI0 Effective cash inflows/ proceeds duly adjusted for flotation cost and tax shield on it as shown
below: (Rs. Million)

Amount of Debentures Rs. 50.00

Less: Flotation Costs (Rs. 50 x 0.02) Rs. 1
Tax advantage on flotation costs (Rs. 1 x 0.35) Rs. 0.35 Rs. 0.65
Effective cash proceeds received Rs. 49.35

𝑅𝑠.3.9 𝑅𝑠.51.3
Therefore, Rs. 49.35 = σ8𝑡=1 (1+𝐾 𝑡 + (1+𝐾 8
𝑑) 𝑑)
Kdhas two elements: (i) the after tax cost pf interest, that is, 12% (1-0.35) = 7.8 % and (ii) flotation costs in
raising funds and payment of premium on redemption of debentures, that is , Rs. 51.3 million – Rs. 49.35
million = 1.95 million. Evidently Kd is to be higher than 7.8% to take note of such costs.
While the determination of Kdinvolves a trial and errors process, it is to be 7.8% plus. For calculating how much
that would be the rule is simple, Rs. 1.95 million (Rs. 51.3 million-Rs. 49.35 million) is the cost of the Rs.
49.35 million funds that have been raised. It yields 4% effective flotation cost. This 4% is to be spead over in
8 years, which approximately is to 0.5 % each year. As a result, the Kdis to be 7.8% + 0.5% = 8.3%.
Accordingly, its precise value can be computed by interpolating two rates of discount, namely, 8% and 9%.

Determination of Kdat 8% and 9%

Years Cash Flows PV factor at (%) Total PV at %

8 9 8 9
1-8 Rs. 3.9 5.747 5.535 Rs. 22.41 Rs. 21.59
8 Rs. 51.3 0.540 0.502 Rs. 27.70 Rs. 25.75
Rs. 50.11 Rs. 47.34

𝑹𝒔.𝟓𝟎.𝟏𝟏−𝑹𝒔.𝟒𝟗.𝟑𝟓=𝑹𝒔.𝟎.𝟕𝟔
Kd= 8% + = 8.27%
𝑹𝒔.𝟓𝟎.𝟏𝟏 −𝑹𝒔.𝟒𝟕.𝟑𝟒=𝑹𝒔.𝟐.𝟕𝟕
Question: 1.2

The Indian subsidiary of an American MNC has raised Rs 80 million to finance its
investment requirement by issuing 7-year, 10% debentures in Indian market. While
interest is to be paid annually, the debentures are to be redeemed at year-end 7, at
5% premium. Floatation cost are estimated at 1%. Assume that tax laws in India
allow full amortization of floatation costs in the first year itself, payment of
premium in the year in which it is paid and corporate tax of 40%. Determine the
effective cost of debt of the Indian subsidiary.
Solution: 7
𝐶𝑂𝐼𝑡 𝐶𝑂𝑃7
Cost of debt is determined by solving the following equation: 𝐶𝐼𝑂 = ෍ +
(1 + 𝐾𝑑 )𝑡 (1 + 𝐾𝑑 )7
𝑡=1

Where COI= Cash flow of interest in years 1-7, duly adjusted for tax advantage, Rs. (80 million x 0.10 x
0.60) = Rs. 4.8 million.

COP7 = Principal repayment in the year of maturity (t=7) [ Rs.80 million + 5% premium, i.e., Rs. 4 million
less tax advantage (Rs. 4 million x 0.40 ) = Rs. 1.60 million = Rs. 82.4 million.]

CI0 Effective cash inflows/ proceeds duly adjusted for flotation cost and tax shield on it as shown
below: (Rs. Million)

Amount of Debentures Rs. 80.00

Less: Flotation Costs (Rs. 80 x 0.01) Rs. 0.8
Tax advantage on flotation costs (Rs. 0.8 x 0.40) Rs. 0.32 Rs. 0.48
Effective cash proceeds received Rs. 79.52

𝑅𝑠.4.8 𝑅𝑠.82.4
Therefore, Rs. 79.52 = σ7𝑡=1 (1+𝐾 𝑡 + (1+𝐾 7
𝑑) 𝑑)
Kdhas two elements: (i) the after tax cost pf interest, that is, 10% (1-0.40) = 6 % and (ii) flotation costs in raising
funds and payment of premium on redemption of debentures, that is , Rs. 82.4 million – Rs. 79.52 million =
2.88 million. Evidently Kd is to be higher than 6% to take note of such costs.
While the determination of Kdinvolves a trial and errors process, it is to be 6% plus. For calculating how much
that would be the rule is simple, Rs. 2.88 million (Rs. 82.4 million-Rs. 79.52 million) is the cost of the Rs.
79.52 million funds that have been raised. It yields 5% effective flotation cost. This 5% is to be spead over in
7 years, which approximately is to 0.71 % each year. As a result, the Kdis to be 6% + 0.71% = 6.71%.
Accordingly, its precise value can be computed by interpolating two rates of discount, namely, 6% and 7%.

Determination of Kdat 6% and 7%

Years Cash Flows PV factor at (%) Total PV at %

6 7 6 7
1-7 Rs. 4.8 5.5823 5.3892 Rs. 26.79 Rs. 25.86
7 Rs. 82.4 0.6651 0.6227 Rs. 54.80 Rs. 51.31
Rs. 84.59 Rs. 77.17

𝑹𝒔.𝟖𝟒.𝟓𝟗−𝑹𝒔.𝟕𝟗.𝟓𝟐=𝑹𝒔.𝟓.𝟎𝟕
Kd= 6% + = 6.68%
Question: 1.3

The Indian subsidiary of an American MNC has raised Rs 100 million to finance its
investment requirement by issuing 10-year, 10% debentures in Indian market. While
interest is to be paid annually, the debentures are to be redeemed at year-end 10, at
5% premium. Floatation cost are estimated at 2%. Assume that tax laws in India
allow full amortization of floatation costs in the first year itself, payment of
premium in the year in which it is paid and corporate tax of 40%. Determine the
effective cost of debt of the Indian subsidiary.
Solution:
10
𝐶𝑂𝐼𝑡 𝐶𝑂𝑃10
Cost of debt is determined by solving the following equation: 𝐶𝐼𝑂 = ෍ +
(1 + 𝐾𝑑 )𝑡 (1 + 𝐾𝑑 )10
𝑡=1
Where COI= Cash flow of interest in years 1-10, duly adjusted for tax advantage, Rs. (100 million x 0.10 x
0.60) = Rs. 6 million.

COP10 = Principal repayment in the year of maturity (t=10) [ Rs.100 million + 5% premium, i.e., Rs. 5
million less tax advantage (Rs. 5 million x 0.40 ) = Rs. 2 million = Rs. 103 million.]

CI0 Effective cash inflows/ proceeds duly adjusted for flotation cost and tax shield on it as shown below:
(Rs. Million)

Amount of Debentures Rs. 100.00

Less: Flotation Costs (Rs. 100 x 0.02) Rs. 2
Tax advantage on flotation costs (Rs. 2 x 0.40) Rs. 0.80 Rs. 1.20
Effective cash proceeds received Rs. 98.80

𝑅𝑠.6 𝑅𝑠.103
Therefore, Rs. 98.80 = σ10
𝑡=1 (1+𝐾 + (1+𝐾
𝑑 )𝑡 𝑑)
10
Kdhas two elements: (i) the after tax cost pf interest, that is, 10% (1-0.40) = 6.0 % and (ii) flotation costs in
raising funds and payment of premium on redemption of debentures, that is , Rs. 103 million – Rs. 98.80
million = 4.2 million. Evidently Kd is to be higher than 6.0 % to take note of such costs.
While the determination of Kdinvolves a trial and errors process, it is to be 6.0% plus. For calculating how much
that would be the rule is simple, Rs. 4.2 million (Rs. 103 million-Rs. 98.80 million) is the cost of the Rs.
98.80 million funds that have been raised. It yields 2% effective flotation cost. This 2% is to be spead over in
10 years, which approximately is to 0.2 % each year. As a result, the Kdis to be 6.0% + 0.2% = 6.2%.
Accordingly, its precise value can be computed by interpolating two rates of discount, namely, 6% and 7%.

Determination of Kdat 6% and 7%

Years Cash Flows PV factor at (%) Total PV at %

6 7 6 7
1-10 Rs. 4.2 7.3600 7.0235 Rs. 30.912 Rs. 29.498
10 Rs. 103 0.5584 0.5083 Rs. 57.52 Rs. 52.35
Rs. 88.432 Rs. 81.848

𝑹𝒔.𝟖𝟖.𝟒𝟑𝟐−𝑹𝒔.𝟗𝟖.𝟖𝟎=𝑹𝒔.−𝟏𝟎.𝟑𝟔𝟖
Kd= 6% + = 4.42%
𝑹𝒔.𝟖𝟖.𝟒𝟑𝟐 −𝑹𝒔.𝟖𝟏.𝟖𝟒𝟖=𝑹𝒔.𝟔.𝟓𝟖𝟒

Since we are getting the value of Kd even less than the estimated range i.e., from 6-7% therefore we will again interpolate
taking rates 1% less this time.
This time we are taking the rates 5% and 6%.

Determination of Kdat 5% and 6%

Years Cash Flows PV factor at (%) Total PV at %

5 6 5 6
1-10 Rs. 4.2 7.7217 7.3600 Rs. 32.43 Rs. 30.91
10 Rs. 103 0.6139 0.5584 Rs. 63.23 Rs. 57.51
Rs. 95.66 Rs. 88.42

𝑹𝒔.𝟗𝟓.𝟔𝟔−𝑹𝒔.𝟗𝟖.𝟖𝟎=𝑹𝒔.−𝟑.𝟏𝟒
Kd= 6% + = 5.56%
𝑹𝒔.𝟗𝟓.𝟔𝟔 −𝑹𝒔.𝟖𝟖.𝟒𝟐=𝑹𝒔.𝟕.𝟐𝟒

This time value of Kd is coming out to be within the range of estimation therefore the correct answer
is 5.56%.
Question: 1.4

The Indian subsidiary of an American MNC has raised Rs 60 million to finance its
investment requirement by issuing 10-year, 15% debentures in Indian market. While
interest is to be paid annually, the debentures are to be redeemed at year-end 10, at
6% premium. Floatation cost are estimated at 5%. Assume that tax laws in India
allow full amortization of floatation costs in the first year itself, payment of
premium in the year in which it is paid and corporate tax of 30%. Determine the
effective cost of debt of the Indian subsidiary.
Solution:
10
𝐶𝑂𝐼𝑡 𝐶𝑂𝑃10
Cost of debt is determined by solving the following equation: 𝐶𝐼𝑂 = ෍ +
(1 + 𝐾𝑑 )𝑡 (1 + 𝐾𝑑 )10
𝑡=1
Where COI= Cash flow of interest in years 1-8, duly adjusted for tax advantage, Rs. (60 million x 0.15 x
0.70) = Rs. 6.3 million.

COP10 = Principal repayment in the year of maturity (t=10) [ Rs.60 million + 5% premium, i.e., Rs. 3 million
less tax advantage (Rs. 3 million x 0.30 ) = Rs. 0.90 million = Rs. 62.1 million.]

CI0 Effective cash inflows/ proceeds duly adjusted for flotation cost and tax shield on it as shown
below: (Rs. Million)

Amount of Debentures Rs. 60.00

Less: Flotation Costs (Rs. 60 x 0.05) Rs. 3
Tax advantage on flotation costs (Rs. 3 x 0.30) Rs. 0.9 Rs. 2.1
Effective cash proceeds received Rs. 57.9

𝑅𝑠.6.3 𝑅𝑠.62.1
Therefore, Rs. 57.9 = σ10
𝑡=1 (1+𝐾 𝑡 + (1+𝐾 10
𝑑) 𝑑)
Kdhas two elements: (i) the after tax cost pf interest, that is, 15% (1-0.30) = 10.5 % and (ii) flotation costs in
raising funds and payment of premium on redemption of debentures, that is , Rs. 62.1 million – Rs. 57.9
million = 4.2 million. Evidently Kd is to be higher than 10.5% to take note of such costs.
While the determination of Kdinvolves a trial and errors process, it is to be 10.5% plus. For calculating how
much that would be the rule is simple, Rs. 4.2 million (Rs. 62.1 million-Rs. 57.9 million) is the cost of the Rs.
57.9 million funds that have been raised. It yields 5% effective flotation cost. This 5% is to be spead over in
10 years, which approximately is to 0.5 % each year. As a result, the Kdis to be 10.5% + 0.5% = 11%.

Since here the precise value is coming out to be 11%, therefore, there is no need to further interpolate.
Question: 2
From the following facts pertaining to an Indian subsidiary of an American multinational, determine
the effective cost of debt to the US parent MNC (In US $).
• Amount borrowed Rs. 3,000 million @ 11% for 6 years
• Floatation costs are estimated to be Rs. 12.85 million.
• Interest is to be paid at the end of each year and principal sum borrowed is to be returned at the end
of 6th year.
• Corporate tax applicable to the Indian subsidiary is 35%
• The rupee is expected to depreciate in relation to the US dollar at the rate of 2% each year for 6
years; the current exchange rate of dollar to the Indian rupee is Rs. 61.50.
• For the tax purposes, total inflation costs can be amortized at a uniform rate during 6 years.
 Solution:
Rs. 3,000 million – Rs. 12.85 million =

Where COI= Cash outflow on interest payments in time period (t=1-6) after adjusting tax savings on
interest payments and flotation costs in US dollars (taking the exchange rate into account)

COP6 = Principal repayment in the year of maturity (t=6)

Since cash outflows are to be in US dollars, proceeds of debt are also to be converted into US dollars, that
is, (Rs. 3,000 million – Rs. 12.85 million = Rs. 2,987.15 million / Rs. 61.50 ) = $48.5715 million.

Determination of Cash Outflows ($) ($ million )

Years Cash Outflows Rate of Exchange Rs. / Cash Outflows

Interest (1-0.35) – Tax Savings on Flotation $
Costs
1 Rs. 213.75* 62.73 $3.4074
2 Rs.213.75 63.984 $ 3.3406

3 Rs.213.75 65.264 $3.2751

4 Rs. 213.75 66.5695 $ 3.2109
5 Rs. 213.75 67.900 $ 3.1480
6 Rs. 3,213. 75** 69.2589 $ 46.4019
* Rs. 3,000 million x 0.11 = Rs. 330 million (1-0.35) = Rs. 214.50 million – (Tax savings on flotation costs Rs. 12.85 million / 6 years = Rs. 2.14 million x 0.35 = 0.75 million ) = Rs.
213.75 million
** Includes principal payment at year-end 6 of Rs. 3,000 million
Based on the cash outflows and cash inflows determined by Kd will be given by the following equation (amount
is in million)

Determination of PV at 5% and 6% ($ million)

Year Cash Outflows PV factor at Total PV at

5% 6% 5% 6%
1 $3.4074 0.952 0.943 3.2438 3.2131
2 $3.3406 0.907 0.890 3.0299 2.9731
3 $3.2757 0.864 0.840 2.8296 2.7510
4 $3.2109 0.823 0.792 2.6425 2.5430
5 $3.1480 0.784 0.747 2.4680 2.3515
6 $46.4019 0.746 0.705 34.6158 32.7133
Total Present Value 48.8296 46.5450

$ 48.8296 −$ 48.5715=$ 0.2581 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

By Interpolation, Kd= 5% + = 5% + 0.11% = 5.11 %
$ 48.8296 −$46.5450=$ 2.2846 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Approximate Kd can also be calculated with the help of below mentioned equation

Kd = Ki (1-t) (1-d)(1+f) - d

Where, Ki = Coupon rate of interest

t = Corporate tax rate
f = flotation costs (duly adjusted for taxes)
d = Depreciation/devaluation rate of the currency in which borrowings are made with respect to the
base currency (US dollar in the present case)

Kd = 11% (1-0.35) (1-0.02) (1+0.0015)* - 2%

= 11% x 0.65 x 0.98 x 1.0015) – 2% = 7.02% - 2% = 5.02%

* Flotation costs are 0.428%; effective after tax flotation costs will be 0.428% - Tax Savings on 0.428 x 0.35 = 0.15%.
Question: 3.1

A US MNC has its subsidiary in India. The subsidiary has issued 12% preference
shares at the face value of Rs 100, to be redeemed at year-end 8. flotation costs are
expected to be 4%; these costs can be amortised for tax purposes during the 8 years
at a uniform rate. The corporate tax rate is 35%. Determine the cost of preference
shares from the perspective of subsidiary.
Solution:

* Determination of Cash Outflows During Years 1-8

Dividend Payment Rs. 12

Less: Tax advantage on flotation cost [of Rs.4/8 years= Rs. 0.5 @ 35% Rs. 0.175
Effective dividend paid/cash outflows Rs. 11.825

Accordingly, Kp =

Given the rate of preference dividend of 12%, the value of Kp is likely to be between 12% and 13%.
 Determination of PV at 12% and 13%

Year Effective Cash Outflows PV factor at Total PV at

12% 13% 12% 13%

1-8 Rs.11.825 4.968 4.799 Rs. 58.75 Rs. 56.75
8 Rs.100.00 0.404 0.376 Rs. 40.04 Rs. 37.60
Total Present Value Rs. 98.79 Rs. 94.35

𝑅𝑠.98.79 −𝑅𝑠.96=𝑅𝑠.2.79
Kd= 12% + = 12% + 0.63% = 12.63%
𝑅𝑠.98.79 −𝑅𝑠.94.35=𝑅𝑠.4.44
Question: 3.2

A US MNC has its subsidiary in India. The subsidiary has issued 14% preference
shares at the face value of Rs 100, to be redeemed at year-end 10. flotation costs are
expected to be 5%; these costs can be amortised for tax purposes during the 8 years
at a uniform rate. The corporate tax rate is 30%. Determine the cost of preference
shares from the perspective of subsidiary.
Solution: 10
𝑅𝑠. 13.85 ∗ 𝑅𝑠. 100
𝑅𝑠. 95 = ෍ +
(1 + 𝐾𝑝 )𝑡 (1 + 𝐾𝑝 )10
𝑡=1

* Determination of Cash Outflows During Years 1-10

Dividend Payment Rs. 14

Less: Tax advantage on flotation cost [of Rs.5/10 years= Rs. 0.5 @ 30% Rs. 0.15
Effective dividend paid/cash outflows Rs. 13.85

10
Accordingly, Kp = 𝑅𝑠. 13.85 𝑅𝑠. 100
𝑅𝑠. 95 = ෍ +
(1 + 𝐾𝑝 )𝑡 (1 + 𝐾𝑝 )10
𝑡=1

Given the rate of preference dividend of 14%, the value of Kp is likely to be between 14% and 15%.
 Determination of PV at 14% and 15%

Year Effective Cash Outflows PV factor at Total PV at

14% 15% 14% 15%

1-10 Rs.13.85 5.2161 5.0187 Rs. 72.24 Rs. 69.51
10 Rs.100.00 0.270 0.247 Rs. 27 Rs. 24.7
Total Present Value Rs. 99.24 Rs. 94.21

𝑅𝑠.99.24 −𝑅𝑠. 95=𝑅𝑠.4.24

Kd= 14% + = 14% + 0.84% = 14.84%
𝑅𝑠.99.24 −𝑅𝑠.94.21=𝑅𝑠.5.03
Question: 3.3

A US MNC has its subsidiary in India. The subsidiary has issued 10% preference
shares at the face value of Rs 100, to be redeemed at year-end 9. flotation costs are
expected to be 2%; these costs can be amortised for tax purposes during the 9 years
at a uniform rate. The corporate tax rate is 40%. Determine the cost of preference
shares from the perspective of subsidiary.
Solution: 9
𝑅𝑠. 9.912 𝑅𝑠. 100
𝑅𝑠. 98 = ෍ +
(1 + 𝐾𝑝 )𝑡 (1 + 𝐾𝑝 )9
𝑡=1

* Determination of Cash Outflows During Years 1-9

Dividend Payment Rs. 10

Less: Tax advantage on flotation cost [of Rs.2/9 years= Rs. 0.22 @ 40% Rs. 0.088
Effective dividend paid/cash outflows Rs. 9.912

9
Accordingly, Kp = 𝑅𝑠. 9.912 𝑅𝑠. 100
𝑅𝑠. 98 = ෍ +
(1 + 𝐾𝑝 )𝑡 (1 + 𝐾𝑝 )9
𝑡=1

Given the rate of preference dividend of 10%, the value of Kp is likely to be between 10% and 11%.
 Determination of PV at 10% and 11%

Year Effective Cash Outflows PV factor at Total PV at

10% 11% 10% 11%

1-9 Rs.9.912 5.7590 5.5370 Rs. 57.08 Rs. 54.88
9 Rs.100.00 0.424 0.391 Rs. 42.4 Rs. 39.1
Total Present Value Rs. 99.48 Rs. 93.98

𝑅𝑠.99.48 −𝑅𝑠. 98=𝑅𝑠.1.48

Kd= 10% + = 10% + 0.27% = 10.27%
𝑅𝑠.99.48 −𝑅𝑠.93.98=𝑅𝑠.5.5
Question: 3.4

A US MNC has its subsidiary in India. The subsidiary has issued 13% preference
shares at the face value of Rs 1000, to be redeemed at year-end 7. flotation costs are
expected to be 3%; these costs can be amortised for tax purposes during the 7 years
at a uniform rate. The corporate tax rate is 32%. Determine the cost of preference
shares from the perspective of subsidiary.
Solution: 7
𝑅𝑠. 129.86 𝑅𝑠. 1000
𝑅𝑠. 970 = ෍ +
(1 + 𝐾𝑝 )𝑡 (1 + 𝐾𝑝 )7
𝑡=1

* Determination of Cash Outflows During Years 1-7

Dividend Payment Rs. 130

Less: Tax advantage on flotation cost [of Rs.3/7 years= Rs. 0.43 @ 32% Rs. 0.137
Effective dividend paid/cash outflows Rs. 129.86

7
Accordingly, Kp = 𝑅𝑠. 129.86 𝑅𝑠. 1000
𝑅𝑠. 970 = ෍ +
(1 + 𝐾𝑝 )𝑡 (1 + 𝐾𝑝 )7
𝑡=1

Given the rate of preference dividend of 14%, the value of Kp is likely to be between 13% and 14%.
 Determination of PV at 13% and 14%

Year Effective Cash Outflows PV factor at Total PV at

13% 14% 13% 14%

1-7 Rs.129.86 4.4226 4.2883 Rs. 574.32 Rs. 556.87
7 Rs.1000.00 0.4251 0.3996 Rs. 425.10 Rs. 399.60
Total Present Value Rs. 999.42 Rs. 956.47

𝑅𝑠.999.42 −𝑅𝑠. 970=𝑅𝑠.29.42

Kd= 13% + = 13% + 0.68% = 13.68%
𝑅𝑠.999.42 −𝑅𝑠.956.47=𝑅𝑠.42.95
Question: 4
The British MNC’s equity shares have a beta of 1.5, the British Treasury bonds yield a rate of return
of 5% and the return on the market portfolio is 11%. Compute the cost of equity capital of the British
multinational.

Solution:
Ke = 5%* + 1.5 (11% - 5%) = 14%

* Return on British bonds is a proxy of risk-free rate of return

The value of beta of 1.5 means that the equity shares of British multinational is more risky than the
average market portfolio. Hence, the required rate of return expected by an equity investor is higher
or the cost of equity is higher. It will obviously decrease with with decrease in the value of beta.
Assume, b is 0.9; Ke is lower at 10.4%, that is, 5% +0.9(11% - 5%) = 10.4%. The reason is that the
equity securities of the British multinational are less risky than those of the market portfolio.
Question: 5

The following information is available in respect of an Indian subsidiary of US parent.

• Current dividend per share is Rs 2.
• Current market price per share is Rs 75.
• Compound growth rate of dividends (%)

1 – 5 Years 15
6 – 10 years 10
11 years and beyond 5

Determine the cost of equity, assuming a fixed dividend pay out ratio.
Solution:
The Ke would be adopted by solving for Ke in the following equation, as it is the case of different growth rates in
expected dividends.

The solution of the above equation gives the value of Ke equal to 9.5%.