PRACTICE QUESTIONS - COST OF CAPITAL

Q.1. A bond with face value Rs 1000 and coupon rate of 15% p.a. is currently available at Rs 900. Five years remain to maturity and
bond is redeemable at par. Calculate YTM.
Q.2. Calculate the cost of preference share capital from the following information: 15% preference shares of face value Rs 100 each,
the current market price being Rs 96 and they being irredeemable in nature.
Q.3. A company has just declared a dividend of 15% on equity share with face value Rs 100 each. The expected future growth rate in
dividend is 12% p.a. Find cost of equity given that the current market price of share is Rs 168.
Q.4. A company paid a dividend of Rs 1.75 / share during the current year. It is expected to pay a dividend of Rs 2 / share during the
next year. Investors forecast a dividend of Rs 3 and Rs 3.50 per share during the two subsequent years. After that it is expected to
grow at 10% p.a. infinitely. If the current market price of share is Rs 28, calculate cost of equity.
Q.5. A company has a beta of 1.8 and risk free rate of return is 8%. If the market return is 14%, calculate the cost of equity.
Q.6. The following information is available with respect to a company:
Source Amount Cost of capital
Equity share capital
(2,00,000 shares of Rs 10 each) 20,00,000 11%
Preference share capital
(50,000 shares of Rs 10 each) 5,00,000 8%
Retained earnings 10,00,000
7.5% Debentures of Rs 100 each 15,00,000 4.5%
Presently the debentures are trading at 94%, preference shares at par and equity shares at Rs 13 / share. Calculate WACC using: (a)
Book value weights; (b) Market value weights
Q.7. Given the information below, calculate weighted average floatation cost.
fe =10%, fp = 5%, fd = 4%, fr = 0%
we = 0.3, wp = 0.1, wd = 0.4, wr = 0.2
Q.8. The share of a company is currently selling at Rs 53/share in the stock market. The company paid dividend at the rate of Rs 3 /
share last year. The estimated growth rate of dividend is 6%. The required rate of return is 12%. Determine the estimated market
price of equity share if growth rate in dividend turns out to be:
a) as estimated
b) rises to 8%
c) falls to 4%
Q.9. The following information is available from the balance sheet of a company:
Equity share capital Rs 5,00,000
12% Preference capital Rs 5,00,000
10% Debentures Rs 10,00,000
Determine WACC. The company has been paying dividend at the rate of Rs 20/share (g=0), tax rate is 30% and current price of Rs
100 share is Rs 160.
Q.10. A company has the following capital structure:
Equity capital (Rs 10 share) Rs 10,00,000
10% Preference share (Rs 100) Rs 2,00,000
12% Debentures Rs 8,00,000
All these securities are traded in the capital market. Recent prices are:
Debentures Rs 110
Preference shares Rs 120
Equity shares Rs 25
The company expects to pay dividend of Rs 2 on equity shares at the end of the year which is expected to grow at 7% p.a. The
company pays tax @ 30%. Calculate WACC using market value weights.
Q.11. The following information has been extracted from the balance sheet of a company:
Equity share capital Rs 400 lakhs
12% Debentures Rs 400 lakhs
18% Loan Rs 1200 lakhs
Determine WACC of the company. It has been paying dividend at a constant rate of 20% p.a. Shares and debentures are being traded
at par. Tax rate is 30%. What difference will it make if the current price of Rs 100 share is Rs 160?