Q.

1 A company has various

alternatives of capital debt mix and cost
thereof as under:
Debt as % Cost Cost of
of Total of Equity
Capital Debt %
%
0 5.00 12.00
10 5.00 12.00
20 5.00 12.50
30 5.50 13.00
40 5.50 13.00
50 6.00 13.50
60 6.00 14.00
70 6.00 14.50
80 7.00 15.00
90 7.50 15.00
100 7.50 15.00
Suggest optimal debt equity mix.
Q.2A Ltd. share is quoted in the market at
Rs. 20 currently. The company paid a
dividend of Rs. 2 per share and the
investor expect a growth rate of 5% per
year.
Compute:
i) The company’s equity cost of capital
ii) If the anticipated growth rate is 8%.
What would be the indicated market
price of the share?
iii) If the company’s cost of capital is 12%
and the anticipated growth rate is
5%p.a. What would be the indicate
market price if the dividend of Rs. 2
per share is to be maintained?
B Ltd. has the following capital structure:
Rs.
Equity Shares 60 Lakhs
12% Preference Share 10 Lakhs
14% Debentures 30 Lakhs
Total 100 Lakhs
The market price of the company’s share
is Rs. 20. It is expected that the company
will pay next year a dividend of Rs. 2 per
share which will grow at 8% for ever.
Assume 40% tax rate.
You are required to:
1. Compute weighted average cost of
Capital based on existing capital
structure.
2. Compute the new weighted average
cost of capital if the company raises an
additional Rs. 20 Lakhs debts by issuing
15% debentures. This would result in
increasing the expected dividend to Rs.
3 per share and leave the growth rate
unchanged but the price of the share
will fall to Rs. 16.