WORKINGS

i Calculating Cost of Equity

R S=R f + β ( R m−R f )
(A) Using CAPM Method

R S=5.82+0.75 ( 10.2−6 )

Rs = 8.97%

Variables Required:  
Rf 5.82%
B 0.75
Rm 10.2%
Rf 6%
Rs ?

(B) Using Dividend d ( 1+ g )

0
Valuation Method k e = +g
ve d1
k e= +g
ve

1.4 ( 1+1.77 % )
k e= +1.77
25
%
ke = 7.47%

Variables Required:  
Dividend 1.4
Ve 25
g ?
No. of Ordinary Shares 287

Calculation of Growth

a. Using Gordon's Growth g=ROI × R etention R ate

Earnings−Dividend
RR= %
Earnings

1.85−1.4
RR= %
1.85

RR = 24.32%

1
 Earnings
ROI¿ %
Invested Capital

ROI = 7.26%
Book Equity
g=7.26 % ×24.32 % Earnings
Net Assets
g= 1.77%

C urrent Dividend
b. Using Dividend Growth
g=
√
n−1

B ase D ividend
−1

CD = 1.4
BD = 0.3
n= 32 0.03
1.4
g= g=
32−1

√ 0.3
−1

g= 5.09%

ii Calculating Cost of Debt

Variables Required:  
Book Value of Long Term Debt 3,047
Book Value of Short Term Debt 5,033
Nominal Value of Debt 100
Market Value of Debt 118
Average Coupon Rate 11%
Tax Rate 50%

ⅈ 100
k d (pre−tax) = ×
vd 1
11 100
k d ( pre−tax)= ×
118 1
Kd (pre-tax)= 9.32%

ⅈ(i−t ) 100
k d (after −tax) = ×
vd 1
11 (i−0.5) 100
k d (after −tax) = ×
118 1
Kd = 4.65%

ii Calculating Cost of Preference

2
 dp 100
k p= ×
v p− X 1
5 100
k p= ×
(84.75−3.39) 1

Kp = 6.15%

Variables Required:  
Book Value Preference Share 70
Nominal Value of Preference
Share 100
Preference Share Coupon Rate 5%
Issue Cost of Preference Shares
(%) $4 of every $100 4%
Cost of Preference 5.90%
Value of Preference Shares ?
Issue Cost of Preference Shares ($) ?

dp 100
k p= ×
vp 1
dp 100
V p= ×
Calculation of Value of Preference kp 1
5 100
V p= ×
5.9 % 1

Vp = 84.75

Issue Cost of Preference = Vp × Issue Cost (%)

Issue Cost of Preference = 3.39