Tute-7 Q1. A company has 15% perpetual debt of RS. 1,00,000. The tax rate is 5%. !

etermine the cost of capital "before tax as #ell as after tax$ assumin% the debt is issued at a$ &ar b$ 10% discount c$ 10% premium Q' ()* +td has issued 15% &reference shares of the face ,alue Rs.100 each to be redeemed after 10 years. -lotation cost is expected to be .%. !etermine the cost of preference Shares. Q . Suppose that di,idend per share of a firm is expected to be Re. 1 per share next year and is expected to %ro# at /% per year perpetually. !etermine the cost of e0uity capital, assumin% the mar1et price per share is Rs. '5. Q. Assumin% the corporate tax rate of 5%, compute the after tax cost of capital in the follo#in% situations2 i$ &erpetual 15% debentures of Rs.1000, sold at a premium of 10% #ith no flotation costs. ii$ 103year 1.% debentures of Rs.'000, redeemable at par, #ith 5% flotation costs. iii$ 103year 1.% preference shares of Rs.100, redeemable at premium of 5% #ith 5% flotation costs. !i,idend tax is 10%. i,$ An e0uity share sellin% at Rs.50 and payin% a di,idend of Rs./ per share, #hich is expected to and di,idends are expected to %ro# at the rate of 5%. 4xcellent &roperties +imited "4&+$ is plannin% to purchase suitable land for an apartment pro5ect for #hich it re0uires Rs.100 la1h. The construction costs #ill be met by the payment from the allotties from time to time as per re0uirement. 6n order to raise Rs.100 la1h, it is proposed to float 15% !ebentures on face ,alue of Rs.100, redeemable at par at the end of 5 years, flotation cost bein% 10%. The corporate tax is 5%. 7alculate 8 d,

Q5

Q/.The Ser,ex company has the follo#in% 7apital structure on 0 5une'00.2 9rdinary shares"',00,000 shares$ Rs..0,00,000 10%&reference Shares Rs.10,00,000 1.% !ebentures Rs. 0,00,000 The company:s shares sell for Rs.'0.6t is expected that company #ill pay next year a di,idend of Rs.' per share ,#hich #ill %ro# at ;% fore,er. Assume a 50%tax rate. )ou are re0uired to2 a$ 7ompute the <A77 based on the existin% capital structure. b$ 7ompute ne# <A77 if the company raises an additional Rs.'0,00,000 debt by issuin% 15%debentures.This #ould result in increasin% the expected di,idend to Rs. and lea,e the %ro#th rate unchan%ed ,but the price of share #ill fall to Rs.15 per share . c$ 7ompute the cost of capital if in "b$ the %ro#th rate increases to 10%