Module : Cost of Capital

1. Rihanna ltd is expected to disburse a dividend of Rs.30 on each equity shares of Rs.10 each.
The current market price of shares is Rs.80. Calculate the cost of Equity capital as per
dividend yield method.

2. Beyonce ltd issued 10,000 shares of Rs.10 each at a premium of Rs 2 each. The company has
incurred issue expenses of Rs.5000. The equity shareholders expects the rate of dividend to
18% p.a. Calculate the cost of equity share capital.

3. Whitney ltd has its equity shares of Rs.10 each quoted in a stock exchange has market price
of Rs.56. A constant expected annual growth rate of 6% and a dividend of Rs.3.60 per Share
was paid for the current year. Calculate cost of capital.

4. Shakira Ltd has its shares of Rs 10 each quoted on the stock exchange, the current market
price per share is Rs.24. The gross dividend per share over the last four years have been
Rs.1.20, Rs.1.32, Rs.1.45 and Rs.1.60. calculate Ke

5. Amy Lee ltd is an all equity financed company. The CMP of the share is Rs. 180. It has paid a
dividend of Rs. 15 per share and expected future growth in dividend is 12%.

6. Janet Jackson ltd is planning to raise money from the capital markets which are expected to
give a return (Rm) of 14%. The T-bill going rate is 8%. The beta of the firm is 0.9. Calculate
the cost of equity based on CAPM model

7. Micheal-bhai Jackson ltd is planning to raise money from the capital markets. Sensex is
expected to give a 10% return in the last one year. The 10 year government yield going rate
is 8%. The Covariance of the Rm and IPOs is 0.12 and their market variance is 0.9. Calculate
the cost of equity based on CAPM model

8. Kylie Minogue ltd, issues 11% irredeemable preference shares of the face value of Rs. 100
each. Floatation costs are estimated at 5% of the expected sale price. What is the Kp, if
preference shares are issued at (i) par value, (ii) 10% premium and (iii) 5% discount.

9. Avril ltd has Rs. 100 preference share redeemable at a premium of 10% with 15 years
maturity. The coupon rate is 12%. Floatation cost is 5%. Sale price is Rs. 95 (net). Calculate
the cost of preference shares.

10. Madonna ltd has 10% perpetual debt of Rs.100,000. The tax rate is 35%. Determine the cost
of capital (before tax as well as after tax) assuming the debt is issued at (i) par , (ii) 10%
discount, and (iii) 10% premium

11. Calculate the explicit cost of debt (after tax) for Annie Lenox limited in each of the following
situations:
 Debentures are sold at par and floatation costs are 5%
 Debentures are sold at premium of 10% and floatation costs are 5% of issue price
 Debentures are sold at discount of 5% and floatation costs are 5% of issue price.
 Assume Interest rate on debentures is 10%, face value is Rs. 100 maturity period is 10 years
and tax rate is 35%
12. Neely limited has paid dividend on equity share @ 24%. The tax rate is 35%. Calculate cost
of retained earnings.

13. The required rate of return on equity is 16% and cost of debt is 12%. The firm has a capital
structure mix of 60% equity and 40% debt. What is the overall rate of return the firm Gwen
ltd should earn?

14. Stefani ltd has a capital gearing ratio of 40%. Its cost of equity is 21% and cost of debt is
15%. Compute WACC

15. Sheena Cements ltd has given you the following capital structure, Calculate WACC based on
book values and market values. Cost of capital is net of tax.

Sources Market Book

Values Values

16. Britney Spears limited is considering raising of funds of about Rs. 100 lakhs by one of the two
alternative methods viz., 14% institutional term loan and 13% non-convertible debentures.
The term loan option would attract no major incidental cost. The debentures would have to
be issued at a discount of 2.5% and would involve a cost of issue of Rs. 1 lakh. You are to
advise the company as to the better option based on the effective cost of capital in each
case. Assume a tax rate of 50%.

17. Caselet: Aries limited wishes to raise additional finance of Rs. 10 lakhs for meeting its
investment plans. It has Rs. 210,000 in the form of retained earnings available for
investment purposes. The following are the further details:
Debt-equity mix 30:70
Cost of debt up to 180,000, 10 percent (before tax); beyond 180,000. 12 percent (before tax)
EPS = Rs. 4 per share (paid)
Dividend payout, 50 percent of earnings
Expected growth rate in dividend, 10 per cent
CMP = Rs. 44 (on BSE).
Tax rate = 35%
YOU are required to
(a) Determine the pattern for raising the additional finance, assuming the firm intends to
maintain existing debt-equity mix
(b) to determine post –tax average cost of additional debt
(c) to determine cost of retained earnings and cost of equity (d) compute overall cost of
capital after tax of additional finance
18.

The Market price per equity share is Rs.12 & per debenture is Rs.93.75

a) What is the earning per share?

b) What is the percentage of cost of capital to the company for the debenture fund and the
equity?

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