Cor

por
ateFi
nance
UNI
TII
IRat
ios

For
mula Expl
anant i
on
1.Gr
ossPr
ofi
tRat
io =(
Gros
sPr
ofi
t/Nets
ales
)*
100=% When,onl ydirectcosti scharged
tosalesandp r
of i
tiscalcul
ated.
2. Oper
ati
ng Pr
ofi
t =(
Oper
ati
ngPr
ofi
t/Nets
ales
)*
100=% When bot h di rect as wel l as
Rat
io i
ndirectOp eratingcosti scharged
tosales,theprof i
tiscalcul
ated
3.Ret ur
n on Cap i
tal =(EBIT/ CapitalEmployed)*
100=% Rateofr eturnont hetotalcapi
tal
Emp l
oyed (ROCE)/ i
nvestedinbus i
nes s
ReturnonI nvest
ment
4.Sal es to Cap i
tal Sales/ Cap i
talemployed=t imes How manyti
mesofcapi
tali
sthe
emp l
oyed sal
es
5. Pr ofi
t t o fix
ed NetPr of i
t/ Fi
xedAssets*100=% Rateofnetp
rof
itt
otot
alass
ets
AssetsRatio (TotalAs sets=FixedAs set
s+I nves
tment
s
+Cur rentAs s
ets
6.
(a)St ock Turnover COGS/ Av erageStock=t i
mes Meas ur es how f astt he stock is
Ratio mov ingt hroug ht hef i
r m ands al
es
i
sg ener ated.
(b)StockVel oci
ty 365 OR 52 OR 12 /St ockTur nover Sp eedhowf as tt hes tockmov es
Ratio = daysORweek sORmont hs
7.(
a) Debt ors Credi
tSal es/ Aver ageDebt or s+Av erage Indicat esef fi
ciencyoft hef i
rmi n
Turnov erRat i
o Bi
llsReceivabl e=t i
mes col lect i
ngmoneyf romdebt ors
(b)Debt orsVelocit
y 365OR52OR12 /Debt orsTur nover Sp eedofcol lect i
on
Ratio = daysORweek sORmont hs
7.(
a)Creditors Credi
t Pur chas es/Av erage Cr edi
tors+ Thes peedwi thwhi cht heamounti s
Turnov erRat i
o AverageBillsPayabl e=t i
mes pai dt ocr editors .
(b)CreditorsVel ocity 365OR52OR12 /Cr editorsTur nover
Ratio = daysORweek sORmont hs
9. Cur r
ent Rat i
o. =Cur r
entAs set s/ CurrentLi abil
it
ies Shor tt erms olv encyoft hefirm or
Wor ki
ngCap i
talrat i
o financi alp ositi
on oft he firm in
shor tr un.I dealr at i
o=2: 1
10.QuickRat io =QuickAsset s/Qui ckLiabilit
ies Immedi at es olvencyoft hefir
m.
= Cur r
ent As sets – St ock – Pr epaid Idealr at i
o=1: 1
Expenses / Cur rent Li abil
iti
es – Bank
Overdraft
-I ncomer eceivedi nadv ance
11 ( a)Debt/ Equity =Bor r
owedFunds / Prop ri
etor’sFunds Ideal r atio = 2: 1. I t help st o
Ratio under s
t andt hel ongt erms olvency
ors oundnes soft hefir m.
Tr adi ng on equi ty( High Gear ed
Cos )

(
b)Capi
tal Gear
ing =FIBS/NFI BS I
s>than1:
1,thefi
rmi
shighg
ear
ed
Rati
o = Borrowed Funds+ Pr efer
ence Share &is<t han 1:
1,the f
irmisl
ow
Capi
tal/ Propr
iet
or’
sFunds–Pr ef
erence g
ear
ed.
ShareCap i
tal
12.Pr
opr
iet
oryRat
io =( Shar
ehol der
sFunds/Totalass
ets)
*100 =pr
oport
ionofprop
riet
or’
sfunds
t
ototalass
ets
,howmuchp ort
ion
 of t otal ass
ets i
s backed by
shareholder
sf und (
equi
ty)
.Ideal
rati
o>65%
Stock Worki
ng =(Cl
osingStock/Wor ki
ngCapit
al)*100 I
dealr ati
o=<100%
Capit
alrat i
o
12.InterestCov
erage =EBIT/Int
erestonDebt=times I
s EBI T enoug h t o c over t he
Ratio i
nterestcos t
.
13. Ear ni
ngs Per =NPAT– Pr ef
erenceDiv
idend /No of =howmuchacomp anyhasear ned
Share equi
tyshares pershare
14. Di v i
dend Per =Equi t
yDi vi
dend/Noofequi t
ys har
es =howmuchdi vidend,thecomp any
Share haspaidp ershar e
15.Di vi
dend Payout =(DPS/EPS)*100 =whatp ercentofear ni
ngsisp aid
Ratio tos hareholder si nt he for
m of
div
idend.
16. Di v
idend Yield =(DPS/ MPS)*100 =howmuchdi vidend,thecomp any
Ratio hasp ai
dp ers harewhenr elat
edt o
theMar ketPricep ershare

36,
00,
000/
2,00,
000=18t
imes

12/18t
imes=0.
67mont
h
365/
18t
imes=20.
28days
I
NCOMESTATEMENT
Sal
es XX
- COGS XX
Gr
ossPr
ofi
t XX
- Op
erat
ingEx
pens
es(
excl
udei
nter
est
) XX
Op
erat
ingPr
ofi
t(EBI
T) XX
- I
nter
est XX
NPBT XX
- Tax XX
NPAT XX
- Pr
efer
enceDi
vi
dend XX
Ear
ning
sav
ail
abl
eforEqui
tys
har
ehol
der
s XX 5,
00,
000
- Equi
tyDi
vi
dend XX 2,
00,
000
Ret
ainedPr
ofi
t/Ear
ning
s XX 3,
00,
000
EPS=5,
00,
000/
10,
000=50
DPS=2,
00,
000/
10,
000=20
MPS=110
DYR=(
20/
110)
*100=18.
18%
Q-1)Givenbel owar esomeoft heinfor
mati
onofParek
arLtdason31stMarch2020.
Parti
cul ars Rs
DebtorsCA 60,
000
OutstandingManuf acturingEx pens
esCL 17,
000
CashBal anceCA 23,
000
Bi
llsPayabl eandCr editor sCL 38,
000
Machinery(Imported)OMI T 30,
000
I
ncomeear nedbutnotr eceivedCA 6,
000
BankOv erdraftCL 15,
000
StockCA 17,
000
PrepaidTravell
ingEx pens esCA 4,
000
CalculateCurrentRat i
oandLi quidRati
oandSt
ockWor k
ingCap
italRat
io

Sol
uti
on:
Cur
rentAss
ets= 60,
000+23,000+6, 000+17,000+4,000=110,
000
Cur
rentLi
abil
it
ies=38,000+15,000+17, 000=70,000
Cur
rentRati
o=CA/ CL=110,000/70,000=1.57:1

Li
qui
dRat
io=QA/
QL=CA–St ock–Prepai
dexpenses/CL-bankover
draf
t
=1,10,
000–17,
000–4,000/70,
000-15,000=89,
000/
55,
000=1.
62:
1

Wor
kingCapi
tal=CA=CL=1,
10,
000–70,
000=40,
000

St
ockWor
kingCap
italr
ati
o=(
17,
000/40,
000)
*100=42.
5%

Q-2)Thef oll
owingar ethecomparati
veProfitandLos sA/cofUmiLt
d.
Particular
s 31- 03- 31-03-
2009 2010
Sales 12,00,000 20,00,000
CostofGoodsSol d 9,60,000 16,60,000
Offi
ceandAdmi nist
rati
onExpenses 36,000 70,000
Selli
ngandDi str
ibuti
onExpenses 48,000 65,000
Fi
nanceChar ges 36,000 45,000
NetPr ofi
t 1,20,000 1,
60,000
CalculateGrossProf i
tRati
o,NetProfi
tRatio,Op er
ati
ngRatioandEx
pens
esRat
io.

Q-3)CalculateReturnonCapi
talEmployed,Retur
nonPr op
riet
orsFund,Ret
urnonEqui
ty
ShareholdersfundsandReturnonEquityShareCapi
tal
.
Rs.
Equi
tyCap i
tal 2,00,
000
8%Pr ef
erenc e 1,00,
000
Capi
tal 4,00,
000
GeneralReserves 1,50,
000(Cr
.)
Profi
tandLos sA/c 2, 00,
000
 SundryCredi
tors 3,
50,
000(
Befor
eInterestandTax
)
Operati
ngProfi
t 2,
00,
000(
at12%p.ainteres
t)
LongTermLoans 30%
TaxRate
Soluti
on:
ReturnonCap i
tal =
(EBI
T/Cap
italEmp
loyed)
*100 =(3,
50,
000/
10,
50,
000)
*100
Employed =33.
33%

Retur
nonPr
opr
iet
ors =(
NPAT/
Prop
riet
or’
sFunds
)*
100 =(2,
28,
200/
8,50,
000)
*100
Fund =26.
85%

ReturnonEqui
ty =[(NPAT-Pr
efDiv)
/(Pr
opri
etor’
s =[ (
2,28,
200-8,
000)
/(8,50,000-
Sharehol
der
sfunds Funds–Prefer
enceCapi
tal
)]
*100 1,
00,000)]*100
=(2,
20,200/7,
50,
000)
*100=29. 36%
Ret
urnonEq
uit
yShar
e =[(
NPAT-PrefDi
v)/Equi
ty =[ (
2,28,
200-8,
000)
/2,00,000]*
Cap
ital Capi
tal
]*100 100
=110%

Worki
ng
Capi
talEmpl
oyed=2,00,000+1,00,000+4,00,000+1,50,000+2,00,000=10,
50,
000
Prop
riet
or’
sFunds=2,00,000+1,00,000+4,00,000+1,50,000=8,50,000

Rs.
Operati
ngPr of i
t(BeforeInterestandTax)OR 3,
50,
000
EBIT
Less:Int
eres t(12%on2, 00,000) (24,000)
NetProfitBef oreTax 3,26,000
Less:Tax(30%on3, 26,000) (97,800)
NetProfitAfterTax 2,28,200
Less:PreferenceDi vi
dend ( 8%on1,00,
000) (8,000)
Profi
tavailablef orequit
ys harehol
ders 2,20,200

Q-5)Tr i
veniLtdhadt hef ol
lowi
ngear
ning slas
tyear
:
ProfitBef oreTax 26,50,000
TaxRat e 40%
Prop osedEqui t
yDivi
dend 25%
Cap i
talEmp l
oyed
10%Pr eferenceShareCap it
al 15,00,000
80,000Equi tySharesofRs .50 40,00,000
CurrentMar ketPr
icep ershare 125/-
Calcul ateEPS,DPS,Di v
idendPayoutRatio,Pri
ceEar
ning
sRat
ioandDi
vi
dendYi
eldRat
io.
Solution:

Rs .
ProfitBeforeTax 26,50,000
Less:tax (10,60,000)
ProfitAfterTax 15,90,000
Less:preferencedivi
dend(10%on15, 00,
000) (1,50,000)
Profitavail
ablef orEqui
tyShar
eholders 14,40,000
Less:equitydiv i
dend(25%of40,00,
000) (10,00,000)
Retainedear nings 4,40,000
Rat
ios

EPS =(
NPAT-Pr
efDi
v)
/No.ofequi
tys
har
es =14,40,000/
80,000shar
es
=18
DPS =Equi
tyDi
vi
dend/
No.ofequi
tys
har
es =10,00,000/
80,000
=12.50
Dividend =(DPS/
EPS)
*100 =(12.50/18)
*100=69.44%
Payoutr at
io
Price =MPS/EPS=ti
mes =125/
18=
6.94t
imes
Ear ni
ngs
Rat i
o
Dividend =(DPS/
MPS)*100 =(
12.
50/
125)
*100=10%
YieldRatio

Sol
uti
ont
oQ-16/what
sap
pgr
oup
/03/
05/
2021 SHRUSHTILTD

Propri
etory =(Pr opri
et or’sFunds/Tot alAs set)*100 = ( 53,00,000/ 1,58,00,
000)* 100=
Ratio 33.
54%
Operati
ng =[ (
COGS + Op erat i
ng ex pens es)
/ Net = [ (
97,00,000 + 55, 00,000)
/
rati
o Sales ]
*100 1,
80,00,000]*100=84. 44%
Return on =( EBI T/Cap it
alEmp loyed) *100 =(36,50,000/ 1,03,00,000)
*100=35. 44
Capit
al
employed
rati
o
Stock =COGS/ Av erag eSt ock =97,00,000/ 12,50,000=7. 76t imes
Turnover
Ratio
Debt Ser vice =EBI T/ Interest 36,
50,000/ 7,50,000=4. 87times
Coverager atio
Or I nterest
Coverager atio
StockWor kng =
i (
Clos ingSt ock/ Wor kingCap i
tal)*100 =(15,00,000/ 24,00,000)*100=62. 5%
Capit
alr ati
o
Debtors =Cr edits ales/ Aver ageTr adeRecei vabl
es =1, 00,00,000/ 50,00,000=2t imes
Turnoverr atio
Debtors =360days/ debtor st urnov errat i
o =360/ 2=180days
Veloci
ty
Credi
tors =Cr editPur chas es/ Av erag eTr ade =70,00,000/ 25,00,000=2. 8t imes
Turnoverr atio Payabl es
Credi
tors =360days/ creditor sturnov err ati
o =360/ 2.89=128. 57days
Veloci
ty
Commentont heProp ri
etor yr atio–Shr usht il
td’sp ropr
iet
oryr atioi s33. 54% whi chisbel owt he
standar
d(i
dle)r
ati
o.Thisshowsthatonl
y33.
54%oftheasset
sareback
edbyownersfundandthe
longterml
iabi
li
ti
eshaveag r
eaterchar
geov
ertheasset
s.Hencet
helongter
ms ol
vencypos
iti
on
ofthecompanyisnotsafe/s
ound.
Wor
king
Pr
opr
iet
or’
sFunds=20,
00,
000+20,
00,
000+15,
00,
000–2,
00,
000=53,
00,
000
Tot
al Ass
ets
=83,
00,
000- 14,
00,
000 + 10,
00,
000 + 60,
00,
000+ 15,
00,
000+ 2,
00,
000+ 2,
00,
000=
1,
58,
00,
000
COGS=10,
00,
000+70,
00,
000+15,
00,
000+20,
00,
000–3,
00,
000-
15,
00,
000=97,
00,
000
Op
erat
ingex
pens
es=32,
50,
000+15,
00,
000+7,
50,
000(
i
nt)=55,
00,
000
Cap
italemp
loyed=20,
00,
000+20,
00,
000+15,
00,
000+50,
00,
000–2,
00,
000=1,
03,
00,
000
Av
erag
eSt
ock=(
Openi
ngSt
ock+Cl
osi
ngSt
ock
)/2=(
10,
00,
000+15,
00,
000)
/2=12,
50,
000
Cur
rentAs
set=60,
00,
000+15,
00,
000+2,
00,
000+2,
00,
000=79,
00,
000
Cur
rentLi
abi
li
ti
es=30,
00,
000+10,
00,
000+15,
00,
000=55,
00,
000
Wor
kingCap
ital=Cur
rentAs
set–Cur
rentLi
abi
li
ti
es=79,
00,
000-
55,
00,
000=24,
00,
000
Av
erag
etr
ader
ecei
vabl
es=(
40,
00,
000+60,
00,
000)
/2=50,
00,
000
Av
erag
etr
adep
ayabl
es=(
30,
00,
000+20,
00,
000)
/2=25,
00,
000

Cal
cul
ati
onofEBI
T

Rs .
Sales 1,80,00,000
-COGS (97,00,000)
Grossp rofi
t 83,00,000
- Op erati
ngex pens
es(excl
udei
nter
est
) (47,50,000)
Operatingp rofi
t 35,50,000
AddNon–Op erati
ngIncome 2,00,000
Less:Non–Op erat
ingexpenses (1,00,000)
ProfitBeforeinterestandt ax(
EBI
T) 36,50,000
- i nterest (7,50,000)
PBT 29,00,000

Sol
uti
ont
oQ-
4/what
sap
pgr
oup
/06/
05/
2021 BHARATLTD

Rati
os 2016 2017
Debtequi
tyr
ati
o=Debt/
Equi
ty =50,000/
1,08,
500 =75,000/
1,76,
500
=0.461:
1 =0.423:
1

Cap
italgear
ingrat
io=( Debt+Pref =50,
000/
1,08,
500 =(75,000 +65,000)
/(1,
76,
500-
Cap
ital
)/(Equi
ty–PrefCapit
al) =0.
461:
1 65,
000)=1,40,
000/1,
11,500
=1.26:
1
Stock Wor ki
ng Cap i
tal ratio = =(20,000/
38,
500)
*100 =( 25,000/ 76,500)
*100
(
Clos i
ngStock/ Work
ingCapi
tal)*100 =51.95% =32. 68%
Li
quid Rat io =( Curr
ent As set – = (
1,51,500-25,
000-6,
000)
/
I
nv entor
y- p
repaid expenses)
/ =76,000/37,500 (75,000- 25,000)
CurrentLiabi
li
ti
es–bankov erdraft) =2.03:1 =1, 20,500/50, 000
=2. 41:1
Thedebtequit
yr ati
oofBhar atLtdisbelows tandardinboththeyear s.Whi leithasworsenedin
2017from 2016.Cap i
talGeari
ngRat i
ois0. 46:1in2016whi chhasi ncr eas edt o1.26:
1i n2017
showi
ngimprovementinthelongterms ol
vencyp osi
tion.Al
sothecomp anywasl owgearedin2017
andhasbecomehi ghgearedin2017.Thecomp anyhass tar
tedpracti
cingt r adingonequityin2017
toimpr
ovethel ongtermli
qui
dityofthecomp any.
TheStockwor
kingCap
italrati
oishi
ghlyabovest
andardinbot
htheyear
s.Howev
ert
her
ati
ohas
fur
theri
mprov
edin2017s howi
ngthecompany’
seffi
ci
encyi
ndis
pos
ingt
hestock
.
Thecompany’
sLi
qui
drati
oishi
ghandabov
estandar
dinboththeyear
sshowi
ngenoughsoundnes
s
&i mmedi
atel
ysolv
encyofthecompanyi
ntheshortr
un.Therati
ohasfurt
heri
mp r
ovedin2017
fr
om2016.
Debt=75,
000
Eq
uit
y=1,
00,
000+65,
000+15,
000+10,
000-
3,000–10,
500=1,
76,
500
Cur
rentAs
set
s=25,
000+62,
500+30,
000+6,
000+13,
000+15,
000=1,
51,
500
Cur
rentLi
abi
li
ti
es=25,
000+25,
000+25,
000=75,
000
Wor
kingCap
ital=Cur
rentAs
set
s–Cur
rentLi
abi
li
ti
es=1,
51,
500-
75,
000=76,
500
I
ll
ust
rat
ion29:14/
5/2021
Bal
anceSheetason31/
3/2014

Li
abilit
ies Rs. Assets Rs
.
EquitySharecapi
tal 4,
00,
000 Plant& machi nery&
ReservesandSurplus 6,
00,
000 OtherFixedAs s
ets
Totaldebt: CurrentAs s
ets:
CurrentLiabi
li
ti
es 5,
00,
000 I
nventory 7,
00,
000
Debtors 3,
33,
333
Cash 41,
667

15,
00,
000 15,
00,
000

For
mul
ast
obeus
ed

Tot
aldebttoNetwor
th = Cur rent Li abil
iti
es 1:
2=Cur r
entLiabil
it
ies/
10,00,000
/(
Equit
yShar eCap i
tal+ CL=10, 00,
000*½=5, 00,
000
Reser
vesandSur p l
us)
Tot
alasset
stur
nover =Sal es/TotalAs
s ets 2=Sal es/15,
00,000
Sales=15,00,
000*2,Sales= 30,00,
000
GPRati
o =(GP/Sal es)
*100 Grossprofi
t=30%ofSal es=30%* 30,
00,
000
GP=9,00,000
 COGS+GP=Sales
COGS+9,
00,
000=30,00,
000
COGS=30,
00,
000-
9,00,
000=21,
00,
000

Aver
age Coll
ecti
on =360*( Debtor
s/Credi
t Assumedent i
res alest obecr edi
tsales
.
Peri
od sales
) 40=360*( Debt ors)/30,00,000
Debtors=40*30, 00,000/ 360
Debtors=3, 33,333
I
nventor
y Turnov
er =COGS/ Closi
ngStock 3=21, 00,
000/ ClosingSt ock
rat
io Closi
ngSt ock=21, 00,000/ 3=7,
00,
000
Aci
dTestrat
ioorQuick = Quick Assets/ Qui
ck QuickLiabil
iti
es=Cur r
entLi abi
li
ti
es
rat
io Liabi
li
ti
es 0.
75=QA/ 5,00,000
= (
Debtors + QA=5, 00,
000*0. 75=3, 75,000
Cash)/
CurrentLi
abili
ti
es QA=Debt ors+Cas h
3,
75,000=3, 33,333+Cas h
Cash=3, 75,
000- 3,33,333=41, 667

CA=Cl osSt ock+Debt

ors+Cas
h
=10,75,000
Tot
alAs sets=FA+CA
15,
00,000=FA+10, 75,
000
FA=4, 25,000

I
ll
ust
rat
ion32:14/
5/2021

Bal
anceSheetofDeep
akCoLt
d

Li
abili
ties Rs
. Rs
. As
sets Rs
. Rs.
Propri
et or
sFunds Fi
xedAss
ets 3,
60,
000
Equit
yShar ecapi
tal 4,
00,
000
ReservesandSurplus 4,
80,
000 Cur
rentAs s
ets:
80,
000 Stock
CurrentLi
abil
it
ies Debtors 1,
10,
000
BankOv erdr
aft Cash 2,
00,
000
Other Cur
rent 80,
000 50,
000
li
abi
liti
es 20,
000
40,
000
60,
000

5,
60,
000 5,
60,
000

Cur
rentr
ati
o = Cur rent As
set
s /
Cur
rent CR=CA/ CL
Li
abi
li
ti
es 2.
5=CA/ CL
CA=2.5CL
Repl
aceCAby2. 5CL
WC=CA–CL
1,
20,
000=2. 5CL–CL
 1,
20,
000=1.5CL
CL=1,20,
000/1.
5
=80,000
CA=2.5CL= 2.
5*80,
000
=
2,00,
000

Li
qui
drat
io =(
CurrentAs set
s-Stock)
/(Cur
rent XXXXX
l
iabi
li
ties-BankOv er
draft
)
Fi
xed Assets t
o =FA/Pr op
riet
orsFunds
Propri
et or sFunds
CA=St ock+Debt ors+ St ock=2,00,000*(11/20)=1,10,000
Cash Debtor
s=2, 00,000*(5/20)=50,000
Cash=2,00,000*(4/20)=40,
000
FA/ PF=0. 75:
1
Therefor e,FA=0. 75PF
BalanceSheetequat ion
Li
abili
ties=As set s
Propri
et or ’
sFunds+Cur rentLiabi
li
t i
es=Fi xedAs s
ets+Cur rentAs
set
s
PF+80, 000=FA+2, 00,
000
ReplacingFAby0. 75PF
PF+80, 000=0. 75PF+2, 00,000
PF- 0.
75PF=2, 00,000- 80,000
0.
25PF=1, 20,000
PF=1, 20, 000/ 0.25
PF=4, 80, 000
FA=0. 75PF=0. 75*4,80,000
FA=3, 60, 000

ForCor
por
ateFi
nanceI
NTERNALS,
Chap
ter3,Fi
nanci
alAnal
ysi
s
Chap
ter4,Cos
tofCap
ital

COSTOFCAPI
TAL-WACC
Thecostofcapit
alisther
etur
ngi
vent othei
nvest
orf orusi
ngthei
rfundinthebusi
nes
s.I
fthe
fundsar
eborrowed,t
hecos
tofcap
itali
sthei
nter
estthatisp
aidontheborr
owedfund.
Themaj
orcomp
onent
sar
eEQUI
TY,PREFERENCEandDEBT.
Ac
omp
any’
scos
tofcap
itali
stheav
erag
ecos
toft
hev
ari
ouscap
italcomp
onent
s.

1. Cost of debt (i
ssued and (
Kd)
=I(1-t),Kd =Costofdebtaftert
ax,I=Annuali
nter
est
redeemabl
eatp ar)(Kd) r
ate,t
=taxrate
2. Cost of debt ( i
ssued at (
Kd)
=(I
/NP)*(1-t),NP=NetProceeds(FV+Pr
emi
um-Di
scount
 premi um or di scount.( thi
s –Float ati
onCost)
formul ai s used when t he
numberofyear sort er
mi s
notk nown)( Kd)
3. Cos tofdebti s sued and ( Kd)=I*(1-t)+[
(RV-NP)/
N]/[ (
RV+NP) /
2]
redeemabl e atp remi
um or RV=Redeemabl eValue(FV+Pr emium-Di
scount)
discount ( thisf ormula is
used when t he numberof
year sortermi sk nown)(Kd)
4. Cos tofPr eference Shar es (
KP)= PD + [ (
RV- NP)/N] / [
(RV + NP)/2],
PD= Annual
i
ssued ( Redeemabl e)(
KP) pr
ef er
enceDi v
idend.
5. Cos tofEquity(Ke) (
Ke)=(D/ P)*100,D=currentdiv
idendpershare,P=market
pr
icep ershare
6. Cos tofEqui ty(Ke)+Gr owth (
Ke)=(D/ P)
*100+G,G=Annualg rowthr
ateofdivi
dend.
App roach

I
ll
ust
rat
ion26:Dat
e19/
05/
2021
(
i
)WACC(
Exi
sti
ngCap
italSt
ruct
ure)

Cap
italComp
onent Rs
. Wei
ght
sas
sig
ned CostofCap
ital Weight
edCos
t
(%)
Equi
ty 40,
00,
000 40,
00,
000/
80,
00,
000=0.
5 Ke =15 7.
5
Pref
erence 10,
00,
000 10,
00,
000/
80,
00,
000 = KP=11.
5 1.
4375
0.
125
Debent
ures 30,
00,
000 30,
00,
000/
80,
00,
000 = Kd=6.
5 2.
4375
0.
375
80,
00,
000 1.
00 11.
375%(WACC)

(
Ke)
=(D/
P)*100+G=[
(2/
20)
*100]+5%=10%+5%=15%
(
Kd)
=I(1-
t)=10%(
1-0.
35)=10*0.
65=6.
5%
(
i
i)Rev
isedWACC(
Rev
isedCap
italSt
ruct
ure)

Capi
tal Rs
. Wei
ght
sas
sig
ned CostofCap
ital Weight
edCost
Component (%)
Equi
ty 40,
00,
000 40,
00,
000/
1,00,
00,
000=0.
4 Ke =20 8
Pref
erence 10,
00,
000 10,
00,
000/
1,00,
00,
000=0.
1 KP=11.5 1.
15
Debentur
es-10% 30,
00,
000 30,
00,
000/
1,00,
00,
000=0.
3 Kd=6.5 1.
95
Debentur
es-12% 20,
00,
000 20,
00,
000/
1,00,
00,
000=0.
2 Kd=7.8 1.
56
100,
00,
000 1.
00 12.
66%( WACC)

Cos
tofNewdebent
ures(
Kd)
=I(1-
t)=12%(
1-0.
35)=12*0.
65=7.
8%
Cos
tofEqui
tyRev
ised(
Ke)
=(D/
P)*100+G=[
(2.
40/
16)
*100]+5%=15%+5%=20%

I
ll
ust
rat
ion28:Dat
e19/
05/
2021
(
i
)WACC(
Exi
sti
ngCap
italSt
ruct
ure)(
usi
ngMar
ketv
alueWei
ght
s)

Cap i
tal Rs
. Wei
ght
sas
sig
ned CostofCap
ital Weight
edCos
t
Comp onent (%)
Debent ures 2,
88,
750 0.
167 6.11 1.
02037
(2750*105)
11% 2,
38,
500 0.
138 11.
47 1.
58286
preference
(2250*106)
EquityShares 12,
00,
000 0.
695 15.
00 10.
425
17,
27,
250 1.
00 13.
02823%
(WACC)

(
Ke)
=(D/
P)*100+G=[
(2/
24-
4)*
100]+5%=10%+5%=15%
(
Kd)
=I*(
1-t
)+[
(RV-NP)
/N]/[
(RV+NP)
/2]
=9*(
1-0.
35)+[
(100-98)
/10]/[
(100+98)
/2]
=(
5.85+0.
2)/
99=6.
05/
99=0.
06111=6.
11%

(
KP)
=PD+[
(RV-NP)
/N]/[
(RV+NP)
/2
=11+[
(100-97)
/10]/[
(100+97)
/2
=(
11+0.
3)/
98.
5=11.
3/98.
5=0.
1147