19.42 Working Notes @k, = [1 (1 ~ 1) + Flotation costs/N] + (RV + SYV/2 [D, (1 + D) + Flotation costsiN] + (RV + SY/2 ividend on preference shares, t= tax rate, RV = redemption value, SV = sale @@k, where = Interest, D, = Financial Management value (face value — flotation cost), n = maturity period, D, = dividend payment tax @@@ k,=(W, x K,) + (W, x K,) + (W, + K,). Ik may be noted that 10% debt-equity mix implies, 90% shareholders equity (consisting 10 % of preference shares and 80% of ordinary shares] 19.C.2 Royal Hotels Lid. is a luxury hotel with following financials. Income Statement of Royal Hotels Ltd for the year ending on March 31, 2014 (Amount in & crore) Particulars ‘Amount ‘Sales revenue 650 Operating costs 450 Operating profit, 200 Financing costs 10 Eamings before tax 790 Taxes (30.9%) 58.71 Earnings after tax 731.29 Preference dividend 650 Preference dividend tax @16.995% 1.10 Eamings avaliable to equity shareholders, 723.68 Balance Sheet of Royal Hotels Ltd as at March 31, 2014 (Amount in & crore) Particulars “Amount ‘Shareholders funds: ‘Share capita: Equity #250 13% Preference shares 50 300 Raserves and surplus: General reserve 90 Long-term assets replacement reserve 10 100 ‘Non-current labilties: Secured loans: 10% Debentures 100 Current liabilities 100 600 Application of funds: Long-term assets Land and buildings (net) 200 Furniture and fitings 200 400 Curent assets 200 600 Due to growing concept of 3Ps (Planet, People and Profit) and the desire to emerge as socially responsible organisation, the Board of Directors of Royal Hotels, comes up with the novel idea of “Green Hotel". A