COST OF CAPITAL

 The Company Cost of capital is the rate

of return expected by the existing
capital providers
Risk Equity Share
Pm Capital

Preference Shares

Pvt sector Bonds

Govt
Risk securities
Free
Int.
Risk
  Cost of Debt
(Redeemable)
I (1-t) + (F-P)/n
Kd = ----------------------------
(F+P)/2

Kd = Cost Of Debt
I = Annual Interest Payment per debenture
F = Redemption price per debenture
P = Net amount realized per debenture
n = maturity period
 Irredeemable Debt

I (1-t)
Cost of Debt = -----------
P
 Cost of Preference Shares
D+ (F-P)/n
Kp = ------------------
(F+P)/2
 Cost of Equity
D1
Ke = ------ + g
Po

Po = Price per equity Share

D1 = Dividend at the end of year one
g = Growth Rate
 Cost of Fresh Equity
D1
Ke = ------ + g
NP

 NP = Net Proceeds
 Cost of Term Loan

= I (1-t)
 Calculation of Weighted average cost of capital

Source Amount Weight C/C Weighted c/c

Equity Sh Cap 5,00,000 .50 13.8% 6.9%

9%Pref. Sh. Cap 2,00,000 .20 9% 1.26%
10%Debentures 3,00,000 .30 5% 1.00%
---------------
WACC 10.2%
========
 Calculation of Weighted average cost of capital
(Revised)

Source Amount Weight C/C Weighted c/c

Equity Sh Cap 5,00,000 .33 14.4% 4.75%

9%Pref. Sh. Cap 2,00,000 .14 9% 1.26%
10%Debentures 3,00,000 .20 5% 1.00%
12% Loan 5,00,000 .33 6% 1.98%
---------------
WACC 8.99%
========
 Calculation of Weighted average cost of capital

Source Amount Weight C/C Weighted c/c

Equity Sh Cap 10,00,000 .5 15.09% 7.54%

10%Pref. Sh. Cap 4,00,000 .2 10 % 2.00%
12%Debentures 6,00,000 .3 6% 1.80%
---------------
WACC 11.34%
========
 Calculation of Weighted average cost of capital
(Revised)
Source Amount Weight C/C Weighted c/c

Equity Sh Cap 10,00,000 .33 17.42% 5.80%

10%Pref. Sh. Cap 4,00,000 .13 10 % 1.33%
12%Debentures 6,00,000 .20 6% 1.20%
14% Loan 10,00,000 .33 7% 2.33%
---------------
WACC 10.66%
========
 Calculation of the growth rate

14.19
Growth Rate is = 5 ------------ - 1
10.60