Equity capital ( 10 lac shares)

12% preference shares ( 10,000 shares) The market price per equity shar
DPS is expected to grow at a cons
Retained earnings redeemable after 7 yrs at par and
14% NCD ( 70,000 debetures) are after 6 yrs at par and their cu
14% TL Floatation cost is 1%.
Total

Author:
Ke = (D1 / P) + g
Cost of equity
d1
g
p
ke Author:

Kp = (C + (FV - P)/n ) / (FV + P)*0.5

Cost of preference share

p
Author:
n Kre = Ke * (1-f)

f
d
kp

Cost of retained earningsAuthor:

f Kb = (I (1-t) + (FV - P)/n ) / (FV + P)*0.5

ke
kr Author:

Ktl = I * (1-t)
Cost of debentures
p
f
t
i
n
kd

Cost of term loan

i
t
kl
 Weights cost of capital
50 12.50% 16.00%
ket price per equity share
10 is Rs 25. the next expected
2.50% 18.60%DPS is Rs 2 and the
pected to grow at a constant rate of 8%. The preference shares are
ble after 7 yrs at par 120 30.00%
and the current 15.84%
market price is Rs 75. the debentures
70 17.50% 9.12%
6 yrs at par and their current quotation is Rs 90. the tax rate is 50%.
n cost is 1%. 150 37.50% 12.60%
400 100% 13.54%

2
8%
25
16.00% fv 100
d% 12%
pv 100
75 dr 9.00%
7
100 0 115.099
12% 1 12 11.0092
18.60% 17.80% 2 12 10.1002
3 12 9.2662
4 12 8.5011
1% 5 12 7.79918
16.00% 6 12 7.15521
15.84% 7 12 6.56441
7 100 54.7034

90
100
50%
 14%
6
9.12%

14%
10%
12.60%
 fv 1000
price 1050
dr 5.00%
ABC Co. issues a b
coupon 5% 10-year, 5 percent
tax 35% bond sells at $1,0
after-tax cost 3.25% debt? If Valence’s
period cf dcf
0 1000
Valence’s after-tax
1 50 47.61905
2 50 45.35147
3 50 43.19188
4 50 41.13512
5 50 39.17631
6 50 37.31077
7 50 35.53407
8 50 33.84197
9 50 32.23045
10 50 30.69566
11 50 29.23396
12 50 27.84187
13 50 26.51607
14 50 25.2534
15 50 24.05085
16 50 22.90558
17 50 21.81483
18 50 20.77603
19 50 19.7867
20 50 18.84447
20 1000 376.8895
ABC Co. issues a bond to finance a new project. It offers a
10-year, 5 percent semiannual coupon bond. Upon issue, the
bond sells at $1,025. What is Valence’s before-tax cost of
debt? If Valence’s marginal tax rate is 35 percent, what is
Valence’s after-tax cost of debt?
cost of capital
 EBIT 5000
WACC 10% Author:
Debt 15000 Interest% * debt

Interest% 5%
Interest 750

VL VUL

Equity 50000 35000

Gopikumar:
CoE 10% 12.1% Increase in leverage increases cost of equity.
Equity holders are paid after debt holders.

VUL 50000

WACC-new 10.0%

Gopikumar:
Interest / CoD + (operating income - interest)/CoE

Author:
Interest% * Debt/Total capital + CoE*Equity/Total capital
debt

Change in capital structure will not affect firm value.

WACC will remain same. Firm value will remain same.

Company A has all equity capital structure.

Operating income: 5000
WACC: 10% all equity.
Assume all cash flows are perpetual.

ost of equity. Issues 15000 debt at 5%.

bt holders. Buys back 15000 equity.

MM1: VL = VUL
Focuses on the effect of capital structure on market value. Capital structure does not affect m

MM2: Focuses on the cost of capital. Cost of equity is a linear function of the D/E ratio.
cost of equity increases as leverage increases.
CoE = rE + (rE - rD) * D/E

With taxes:

g income - interest)/CoE Value of levered firm = value of unlevered firm + tax*value of debt (debt tax shield)

WACC of a firm with debt must be lower than that of all equity firm.
CoE = rE + (rE - rD)*(1-t)*D/E.
ital structure does not affect market value.

unction of the D/E ratio.

ebt (debt tax shield)

firm.