Solved Problem 14.

1
Capital structure of Adamus Ltd in book value terms (Amounts in Rupees)

Face vallue
Source of financing No.of insruments per Interest rare Market price Book value
instrument per
instrument
Equity shares 20,000,000 10 50 200,000,000
Preference shares 500,000 100 12% 85 50,000,000
Retained earnings : 350,000
Debentures 1,200,000 100 14% 90 120,000,000

Term loans 13% 80,000,000

Total 450,350,000
Next expected dividend per share 2 Cost of equity and retained earnings 16.00%
Dividend growth
Preference rate
shares expected after
redeemable 12% Cost of preference (approx.formula) 14.84%
( years) 10 Post-tax cost of debentures (approx.formula) 11.91%

Debentures redeemable after ( years) 5 Post-tax cost of term loans 9.10%

Tax rate 30%

Solved problem 14.3

Tax rate 35%

Pre-tax cost of debt 10%

Debt equity ratio 0.6 : 1
Risk-free rate 8%
Market risk
premium 7%
Beta of the equity 0.81
WACC 0.11 Formula used =B71/(B71+D71)*B70*(1-B69)+D71/(B71+D71)*(B72
The above is obtained using the following steps
1. Enter the various given values leaving the value for beta blank. In the WACC value cell type the formula for that as shown
2.On the Tools menu, click Goal Seek.
3.In the Set cell box, enter the reference for the cell that contains the formula Here, this is cell B75.
4.In the To value box, type the result you want. Here it is 11%.
5 In the By changing cell box, enter the reference for the cell that contains the value you want to adjust viz. cell B74.
6 Click OK.
m 14.1

Market
Component Market value value Product of
cost(1) (2) proportion(3 (1) & (3)
Source of capital
Equity capital and )
retained earnings 16.00% 1,000,000,000 0.81 13.00%
Preference shares 14.84% 42,500,000 0.03 0.51%
Debentures 11.91% 108,000,000 0.09 1.05%
Term loans 9.10% 80,000,000 0.07 0.59%
Average
cost of
Total 1,230,500,000 capital 15.15%

(1-B69)+D71/(B71+D71)*(B72+B74*B73)

he formula for that as shown

75.

adjust viz. cell B74.

Solved problem 14.2
Project cost 20,000,000

Period in years 10

After-tax annual cash flow 4,000,000

Tax rate 35%
Target debt-equity ratio 1 : 1
Cost of equity 16.90%

Pre-tax cost of debt 14%

Floatation cost of equity 12%

Floaion cost of debt 2%
WACC 13%
Average floatation cost 7%
NPV of the expansion project
1,704,974
ignoring floatation cost
Floatation cost 21,505,376
NPV of the expansion project with
floatation cost 199,598