Extra questions on Cost of Capital

Q.1. XYZ Ltd, issued 11% debentures of Rs. 150 each which is issued at 2% discount and
redeemable at 5% premium. Find the cost of the debt if the issue expenses are 1% of the face
value of debentures. Consider the income tax rate of tax is 30%.
Ans:
RV −NP
I ( 1−t ) +{ }
n
Kd = ∗100
RV + NP
2
RV=150+7.5 = 157.5
NP = 150-3-1.5=145.5

157.5−145.5
16.5 ( 1−0.3 ) +{ }
1
Kd = ∗100
157.5+145.5
2
11.55+ 12
Kd = ∗100
151.5
Kd = 15.54%

Q.2. TISCO issued 10,00,000, 14% preference shares of Rs. 50 each redeemable after 10 years.
The tax rate is 35%. The floating cost is 2% of the issue price. The preference shares are
issued at 5% premium and redeemable at par. Determine the cost of issuing preference shares.
Ans:
RV −NP
PD ( 1+ DDT )+{ }
n
Kp = ∗100
RV + NP
2
NP = 50 + 2.5 – (52.5*2%) = 51.45
50−51.45
7+{ }
10
Kp = ∗100
50+ 51.45
2

7−0.145
Kp = ∗100
50.725
Kp = 13.51%

Q.3. BMR Pvt Ltd has declared dividend of Rs. 5 per share. The face value of the shares is 40
whereas the market price is Rs. 75. Calculate the cost of equity shares.
What will be your answer if the Company is expecting a growth rate @ 4%?
Ans:
1. Dividend is fixed
 DPS
Ke= ∗100
MPS
5
Ke= ∗100 = 6.67%
75

2. Dividend growth
Ke= [DPS 1
MPS ]
∗100 + g
DPS1 = 5 + 5*4% = 5.2 g = 4%
Ke= [5.2
75 ]
∗100 + 4 %=10.93 %

Q.4. The Government securities are offering 6% rate of interest and the Sensex yield 13% returns.
Beta factor the Company is 1.4. What is the cost of equity as per CAPM approach.
Ans:
Ke= R f + β(Rm−Rf )
Ke= 6 % +1.4(13 %−6 %)
Ke= 15.8 %

Q.5. The profit before interest and tax of Techno services pvt ltd. was Rs. 12,50,000. The
Company has capital structure as under.
1. 8% Debentures of Rs. 100 each (Market price Rs. 105) 10,00,000
2. 12% preference share capital of Rs.10 each (Market price 10.5) 20,00,000
3. 1,00,000 equity shares of Rs. 10 each (Market price 30) 10,00,000
Tax rate = 30%
What is the cost of debentures, preference shares and equity shares (EPS approach)?WACC
Ans:
I ( 1−t ) 8 ( 1−0.30 )
Kd = ∗100= ∗100 = 5.33%
Np 105
PD 1.2
Kp = ∗100 = ∗100 = 11.43%
Np 10.5
Ke= [ EPS
MPS ] [
∗100 =
5.79
30 ]
∗100 =19.3 %

Calculation of EPS
PBIT 12,50,000
Less: Interest (10,00,000*8%) 80,000
PBT 11,70,000
Less: Tax @ 30% 3,51,000
PAT 8,19,000
Less: Preference Dividend (20,00,000*12%) 2,40,000
Profit available for Equity Shares 5,79,000
No if Equity shares 1,00,000
EPS 5.79
WACC
Particulars Amt(Rs.) Weight Cost Weighted
Cost
Equity Capital 10,00,000 0.25 19.3% 4.82%
8% Debentures 10,00,000 0.25 5.33% 1.33%
12% PSC 20,00,000 0.50 11.43% 5.72%
40,00,000 1.00 WACC 11.87%