FINANCIAL MANAGEMENT - CPC5A

PROBLEMS FROM UNIT – 3 - Cost of Capital – 5 MARKS QUESTIONS

1. Q.15.B November 2019 – Cost of Capital

X limited issued 50,000 8% debentures of Rs. 10 each at a premium of
10%. The cost of floatation is 2%. The rate of tax applicable to the
company is 60%. Compute the cost of debt capital

2. Q.15.B November 2018 – Cost of Capital

A company issues 1000 equity shares of Rs. 100 each at a premium of
10%. The company has been paying 20% dividend to share holders for
the past five years and expects to maintain the same in the future also.
Compute the cost of equity capital. Will it make any difference in the
market price of equity share is Rs. 160?

3. Q.17.B November 2018 – Cost of Capital

X limited issued 50,000, 8% debentures of Rs. 10 each at a premium of
10%. The costs of floatation 2%. The rate of tax applicable to the
company is 60%. Compute the cost of debt capital.

4. Q.17.B November 2017 – Cost of Capital

A company issues 10000, 10% preference shares of Rs. 100 each at a
discount of 5%. The cost of issue is Rs. 2 per share. Calculate the cost of
preference capital.

5. Q.15.B November 2016 – Cost of Capital

Anand Ltd offers for public subscription equity shares of Rs. 10 each at a
premium of 10%. The company pays an underwriting commission of 5%
on the issue price. The equity shareholders expect a dividend of 15%
a) Calculate the cost of equity capital
b) Calculate the cost of equity capital, if the market price of the
share is Rs. 20

6. Q.19.B November 2016 – Cost of Capital

Alpha Ltd. Issued 10% redeemable preference shares of Rs. 100 each,
redeemable after 10 years. The floatation costs were 5% of the normal

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 value. Compute the effective cost to the company if the issue is made
at
a) Par
b) A premium of 5%
c) A discount of 5%

7. Q.16.B November 2015 – Cost of Capital

A company issues 10 years 8% debentures of Rs. 90 (face value Rs. 100).
The marginal rate of interest applicable to the company is 50%.
Calculate cost of debt after tax

8. Q.17.B November 2015 – Cost of Capital

A company has 10% redeemable preference shares of 1, 00,000
redeemable at the end of the 10 th year from the year of their issue. The
underwriting costs came to 2%. Calculate the cost of preference share
capital

9. Q.13.B November 2014 – Cost of Capital

Dewey Ltd has an EBIT of Rs. 4, 50,000. The cost of debt is 10% and the
outstanding debt is Rs. 12, 00,000. The overall capitalization rate (Ko) is
15%. Calculate the total value of the firm and equity capitalization rate
under NOI approach

10. Q.14.B November 2014 – Cost of Capital

A company issues Rs. 10, 00,000, 13% debentures at a discount of 5%.
The debentures are redeemable after 5 years at a premium of 5%.
Calculate before tax and after tax cost of debt, if the tax rate is 50%.

11. Q.16.B November 2014 – Cost of Capital

Alpha Ltd issued 10,000, 10% redeemable preference shares of Rs. 100
each, redeemable after 10 years. The floatation costs are 5% of the
normal value. Compute the effective cost to the company if the issue is
made at (a) Par; (b) a premium of 5% and (c) a discount of 5%

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12. Q.14.B April 2016 – Cost of Capital
A company issues 5,000 12% debentures of Rs. 100 each at a discount
of 5% commission payable is Rs. 25,000. Debentures are repayable after
5 years. Calculate the cost of debentures after tax assuming tax 50%.

13. Q.18.B April 2016 – Cost of Capital

A company issued 1000 shares of Rs. 100 each. The floatation cost is
expected to be 5%. The company pays dividend per share at Rs. 10. It is
expected the growth rate will be 5%. Calculate the cost of equity.

14. Q.19.B April 2016 – Cost of Capital

The firm’s cost of capital (return available to shareholders) is 15%. The
average tax rate of shareholders is 40% and it is expected that 2% is
brokerage cost that shareholders will have to pay while investing their
dividends is alternative securities. What is the cost of retained
earnings?

15. Q.14.B April 2015 – Cost of Capital

A company issues 10,000 10% preference shares of Rs. 100 each. Cost
of issue is Rs. 2 per share. Calculate cost of preference capital if the
shares are issued at par.

16. Q.13.B April 2014 – Cost of Capital

The market price of a share is Rs. 140 and a company plan to pay a
dividend of Rs. 9 per share. The growth in dividend estimated at the
rate of 10%. Find out the cost of equity capital.

17. Q.15.B April 2013 – Cost of Capital

A Ltd. issues Rs. 1, 00,000, 9% debentures at a premium of 10%. The
cost of floatation is 2%. The tax rate is 60%. Find out the cost of debt
capital.

18. Q.17.B April 2013 – Cost of Capital

Your company’s share is quoted in the market Rs. 20 currently. The
company pays a dividend Rs. 1 per share and the investor’s market
expects growth of 5% per year. Compute company’s equity share cost
of capital.

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19. Q.18.B April 2013 – Cost of Capital
A company issues 10,000, 9% preference shares of Rs. 100 each at a
discount of 5%. The cost of issue is Rs. 3 per share. Calculate the cost of
preference capital.

20. Q.13.B April 2012 – Cost of Capital

A company issues 5000, 12% debentures of Rs. 100 each at a discount
of 5% commission payable is Rs. 25,000. Debentures are repayable after
5 years. Calculate the cost of debentures after tax assuming tax 50%.

21. Q.14.B April 2012 – Cost of Capital

A company maintains debt equity ratio 40 : 60. The desired rate of
return after tax on debt is 4% and on equity is 10%. The company is
intending for investing in a project which will cost Rs. 40,000. You are
required to calculate the cost of capital assuming the market value of
share remains consistent even after raising additional funds.

22. Q.15.B April 2012 – Cost of Capital

A company issued 1000 shares of Rs. 100 each; the floatation cost is
expected to be 5%. The company pays dividend per share at Rs. 10. It is
expected the growth rate will be 5%. Calculate the cost of equity.

23. Q.19.B April 2012 – Cost of Capital

A firm (Ke) (Return available to shareholders) is 15%. The average tax
rate of share holders is 40% and it is expected that 2% is brokerage cost
that share holders will have to pay while investing their dividends is
alternative securities. What is the cost of retained earnings?

FINANCIAL MANAGEMENT - CPC5A

PROBLEMS FROM UNIT – 3 - Cost of Capital – 10 MARKS QUESTIONS
1. Q.21.C November 2019 – Cost of Capital
Samy company’s share is quoted in the market at Rs. 20 currently. The
company pays a dividend of Rs. 1 per share and investor’s market
expects a growth rate of 5% per year
a) Compute the company’s equity cost of capital

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 b) If the anticipated growth rate is 6% p.a., calculate the indicated
market price per share
c) If the company’s cost of capital is 8% and anticipated growth
rate is 5% p.a., calculate the indicated market price if the
dividend of Rs. 1 per share is to be maintained

2. Q.22.C April 2013 – Cost of Capital

M/s. Jakku corporation has a capital structure of 40% of debt and 60%
equity. The company is presently considering several alternative
investment proposals costing less than Rs. 20 lakhs. The corporation
always raises the required funds without distributing is present debt
equity ratio. The cost of raising the debt and equity are as under :

Cost of Cost of
Project cost
debt equity
Upto Rs. 2 lakhs 10% 12%
Above Rs. 2 lakhs and upto Rs. 5 lakhs 11% 13%
Above Rs. 5 lakhs and upto Rs. 10 lakhs 12% 14%
Above Rs. 10 lakhs and upto Rs. 20 lakhs 13% 14.50%
Assuming the tax rate at 50% calculate
a) Cost of capital of two projects X and Y whose fund requirements
are Rs. 6.5 lakhs and Rs. 14 lakhs respectively.
b) If a project is expected to give after tax return of 10% determine
under what conditions it would be acceptable?

FINANCIAL MANAGEMENT - CPC5A

PROBLEMS FROM UNIT – 3 - Cost of Capital - WACC – 10 MARKS
1. Q.22.C November 2018 – Cost of Capital - WACC
A firm has the following capital structure and after tax costs for the
different sources of funds used
Amount Proportion After Tax
Sources of Funds (Rs.) (%) (%)
Debt 15,00,000 25 5
Preference shares 12,00,000 20 10
Equity shares 18,00,000 30 12
Retained earnings 15,00,000 25 11
Total 60,00,000
You are required to compute the weighted average cost of capital

2. Q.22.C November 2016 – Cost of Capital

From the following particulars relating to the capital structure of Blue

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 Ltd., calculate the overall cost of capital, using:
a) Book value weights and
b) Market value weights
Book Value Market Value
(BV) (MV)
Rs. Rs.
Equity Share Capital 45,000 90,000
Retained Earnings 15,000
Preference Share
10,000 10,000
Capital
Debentures 30,000 30,000
The after-tax cost of different sources of finance is:
Equity share capital 14%, Retained earnings 13%, Preference share
capital 10%, Debentures 8%

3. Q.24.C November 2015 – Cost of Capital

From the following particulars relating to the capital structure of Blue
Ltd. calculate the overall cost of capital using book value and market
value weights.
Book Value Market Value
Share of Funds
(Rs.) (Rs.)
Equity Share Capital 45,000 90,000
Retained Earnings 15,000 --
Preference Share Capital 10,000 10,000
Debentures 30,000 30,000
The after-tax cost of different sources of finance is
Equity Share Capital 14%
Retained Earnings 13%
Preference Share Capital 10%
Debentures 8%

4. Q.22.C November 2014 – Cost of Capital - WACC

The following is the capital structure of Moris Ltd.

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 Amount Market Value.
Sources C/C
Rs. Rs
14% Preference Capital 2,00,000 2,30,000 14%
Equity Capital 5,00,000 7,50,000 17%
16% Debt 3,00,000 2,70,000 8%
Total 10,00,000 12,50,000
Calculate the weighted average cost of capital, using book value weights
and market value weights

5. Q.22.C April 2015 – Cost of Capital

From the following particulars relating to the capital structure of Blue
Ltd., calculate the overall cost of capital, using:
a) Book value weights and
b) Market value weights
Book Value Market Value
(BV) (MV)
Rs. Rs.
Equity Share Capital 45,000 90,000
Retained Earnings 15,000
Preference Share
10,000 10,000
Capital
Debentures 30,000 30,000
The after-tax cost of different sources of finance is:
Equity share capital 14%, Retained earnings 13%, Preference share
capital 10%, Debentures 8%

6. Q.22.C April 2014 – Cost of Capital

From the following particulars relating to the capital structure of Blue
Ltd. calculate the overall cost of capital using book value and market

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 value weights.
Book Specific
Market
Share of Funds Value Cost
Value (Rs.)
(Rs.) After Tax
Equity Share Capital 45,000 90,000 14%
Retained Earnings 15,000 -- 13%
Preference Share Capital 10,000 10,000 10%
Debentures 30,000 30,000 55

7. Q.22.C April 2012 – Cost of Capital

Assuming no taxes and given the Earnings Before Interest and Taxes
(EBIT) Interest (I) at 10% and equity capitalisation rate (Ke) below,
calculate the total market value of each firm.

EBIT I
Firms Ke
Rs. Rs.
A 2,00,000 2,00,000 12%
B 3,00,000 60,000 16%
C 5,00,000 2,00,000 15%
D 6,00,000 2,40,000 18%

Also determine the weighted average cost of capital for each firm.