1

Meaning

Cost of Capital means cost of obtaining funds i.e. average rate of

return that the investors in a firm would expect for supplying
funds to the firm.
OR
It is the minimum rate of return which a firm, must and is
expected to earn on its investments so as to maintain the market
value of its shares
SIGNIFICANCE OF COST OF CAPITAL

• Helpful in capital Budgeting

• Helpful in capital structure decisions
• Helpful in evaluating the financial
performance
• Basis for other financial decisions like
dividend policy, working capital decisions etc.
 Cost of Debt

Cost of
Preference Share
Cost of Specific
Source of Finance
Cost of Equity

Computation of Cost of Retained

Cost Earning

WACC
Composite Cost
of Capital
MWACC
 Cost of Debt
✓ Debt may be in the form of debenture, bond
and term loan from the financial
Institutions. Debenture

Loan

Cost of
Debt

✓ On Debt, Interest is paid to the Investors &

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payment of interest is a Fixed obligation.
 Cost of Debenture
In case of Irredeemable debt
Kd = I(1-t)
Debenture
NP
Where
I = Interest
NP= Net proceeds
Irredeemable Redeemable
Cost of Redeemable debt

Kd = I (1-t)+ 1/n (RV-NP)

½ (RV+NP) 6
Q1. Rayon Steel ltd. has issued 30000 irredeemable 14% debentures of Rs.150
each. The cost of floating of Debenture is 5% of the total issued amount.
The company’s taxation rate is 40%. Calculate the cost of Debt.

Q2. Surya Industries has raised fund through issue of 10,000 debenture of Rs. 150
each at a discount of Rs 10 per debenture with 10 years maturity. The coupon rate is
16%.The floatation cost is Rs.5 per debenture. The Debenture are redeemable with
10% premium. Corporate tax is 40%.Calculate the cost of Debt.

Q3. A company recently made an issue of Nonconvertible debenture for Rs.400

Lakhs. The terms of the issue are as follows;
Each Debenture has a face Value of Rs.100 and carries a rate of Interest of 14%.
the debenture is redeemable at a premium of 5% after 10 yrs.
if the company realized Rs.97 per debenture and the corporate tax rate is 50%
What is cost of Debt?
Q4. Z steels Ltd has issued 50,000 irredeemable 15% debenture of Rs.100 each.
The cost of floatation of debenture is Rs.5 per share
The company’s taxation rate is 50%. Calculate the cost of debt.

Q5. N ltd has raised a term loan of Rs.2 Crores from a commercial bank on a prime
Lending rate plus 4%. The prime lending rate of the bank is 12%. The company’s
Corporate rate of tax is 40%. Calculate cost of debt raised from the bank.
Cost of Preference Capital
Kp = D/NP
Preference
Where D = Annual Preference dividend Share
NP = Net Proceeds

Redeemable Preference Shares

Kpr = D+1/n( MV-NP) Irredeemable Redeemable
1/2 (MV+NP)
Where
MV = Maturity value of Preference
shares
 Cost Of Preference Share
Q6. Green field Ltd has issued 10,00,000 irredeemable preference shares of Rs 150 each
At a coupon rate of 14%. The issue expenses are Rs.15 per share. Calculate the cost of
Preference share.

Q7. The term of the Preference share is made by Cola Ltd are as follows;
Each preference share has a face Value of Rs.100 and carries a rate of Dividend of
14%. The share is redeemable after 12 yrs. at par. If the net amount realized per share
Is Rs.95, what is cost of preference shares.

Q8. Dell Ltd has Rs 100 preference share redeemable at a premium of 10% with 15 yrs.
Maturity. The coupon rate is 12%. Floatation cost is Rs.5. Sales price is Rs. 95.
Calculate the Cost of Preference share

Q9. A firm has issued preference shares of the face value of $100 with the promised
Dividend of $12 per annum after incurring a floating cost of 2%. What is the cost of
Preference share to the company.
Q10.Excel Co. Ltd has preference share having face value of $100 per share.
The rate of preference dividend is 12 per cent p.a. Shares are redeemable
after 10 years at par. The net amount realized per share is $90. Determine
the cost of preference share capital.
COST OF EQUITY SHARE CAPITAL
1.Dividend yield Method
Ke = D/NP or D/MP
Where D = Expected dividend per share
NP =Net Proceeds per share
MP = Market Price per share
2.Dividend yield plus growth in dividend method
Ke = D1 + g
NP
Or D0 (1+g)
+g
NP
3. Earning Yield Method

Ke = Earnings per share / Net Proceeds

Or
= Earnings per share / Market Price per share

4. CAPM Method

= Rf + β(Rm – Rf)
 Cost Of Equity
Q11. X ltd issued 10,000 equity share 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%. Calculate the cost of equity share capital. Will your answer be
Different if the current market price of share is Rs 21?.

Q12. The equity of Y ltd are traded in the market at Rs.90 each. The expected current yea
Dividend per share is Rs.18. the subsequent growth in dividend is expected at the rate of
6%. Calculate the cost of equity.
ii. In the above question if the dividend of Rs.18 is the last year dividend then
calculate the cost of equity

Q13.ENY has its equity share of Rs10 each quoted in a stock exchange has a market price
Of Rs.56. A constant expected annual growth rate is 6% and a dividend of Rs.3.60 per
Share has been paid by the company in the previous year. Calculate cost of equity.
Q14. The market price per share of Dash Ltd is Rs.125. the dividend declared per share
is Rs 12 per share and the DPS is expected to grow at a constant rate of 8%
Calculate the cost of equity.
Q15.Y ltd has 50,000 equity shares of Rs 10 each and its current market price is Rs 45
each The after-tax profit of the company is Rs. 9,60,000. calculate the cost of equity
capital Based on earning per share method.

Q16.M Ltd’s share beta factor is 1.40. The risk-free rate of interest on government
securities is 9%. The expected rate of return on company equity share is 16%. Calculate
the cost of Equity based on CAPM model.

Q17. The Beta coefficient of Dell Ltd is 1.2. The company has been maintaining 5%
Growth in dividend and earnings. The last year dividend paid is Rs.2.40 per share.
Return on Government securities is 10%. Return on Market portfolio is 14%.
The current market price of one share is Rs 28. The earning per share is Rs3.90.
Calculate the cost of equity based on:
Dividend Yield Model
Dividend Growth model & CAPM model.
Q18. The share of the company are selling at Rs.40 per share and it had paid a dividend
of Rs.4 per share last year. The investor’s market expects a growth rate of 5% per year.
Compute the company’s equity cost of capital;

Q19.Jaguar plastic corporation expects to pay $6 dividend this year to common

shareholders. The past record shows that dividend has grown by 2 per cent each year.
Jaguar’s shares has a Current market price of $45 Per share. Determine the cost of
capital.

Q20. New Alliance Ltd gives dividend to its shareholders of $2 per share.
The growth rate of Dividend is 5 per cent and is expected to remain constant.
The current market price per share is $60 and floating cost per share is $2.
calculate the cost of new issue.
Q21. Micro corporation has equity stock with listed Beta of 1.35.
The estimated market return is 12 per cent and the risk-free rate based on government
bond is 6.5 per cent. Calculate the cost of equity.
 Weightage Average Cost Of Capital
Q22. A firm has the following capital structure and after tax cost for the different sources of funds.
used
Source of funds Amount After tax cost

Debt Rs 15,00,000 8%
Preference shares Rs 12,00,000 10%
Equity shares Rs 18,00,000 15%
Retained Earnings Rs 15,00,000 11%

You are required to calculate the Weightage Average cost of Capital

(1) Book Value Based
(2) Market value based if the firm has 18000 equity shares of Rs 100 each outstanding
and the current market price is Rs 300 per share.
Q23. JK cements Ltd has the following Capital Structure:

Particulars Market value Book Value Cost (after tax)

Equity Share 80 lakhs 120 lakhs 18%
Preference share 30 lakhs 20 lakhs 15%
Debenture 40 lakhs 40 lakhs 14%
Calculate the company’s weighted Average Cost of Capital based on book value &
Market value

Q24.ANZ has a gearing ratio of 40%. Its cost of equity is 21% and cost of debt is
15%. Calculate the company’s WACC

Q25. The required rate of return on equity is 16% and the cost of Debt is 12%. The
firm has a capital structure mix of 60% equity and 40% debt. What should be the
overall rate of Return of the firm to maintain it’s market value
 Q26. Sunpharma ltd has the following capital structure:
Particulars (Rs. crore)
Equity Capital (1crore Shares @ Rs 10 each) 10
Preference Share Capital, 11% (1lakh @ Rs.100) 1
Retained earnings 12
Debenture, 13.5%(500000 debenture @100) 5
Term Loan, 12% 8
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The next expected dividend per share is Rs.1.50. The Dividend per share is expected
to grow @ 7%. The market price per share is Rs.20. Preference stock, redeemable
after 10 years is currently selling for Rs.75 per share. Debentures, redeemable after
6 years are selling for Rs.80 per debenture. The tax rate for the company is 50%
Calculate the WACC using
i. Book Value proportions
ii. Market Value proportions
Q27. You are required to determine the weighted average cost of capital using
(i) Book value Weights & (ii) Market Value weights.
The following information is available for your perusal. The capital structure is……
Debenture (Rs 100 per debenture) Rs 8,00,000
Preference Shares ( Rs 100 per share) Rs 2,00,000
Equity Shares ( Rs 10 per share) Rs 10,00000
All these securities are traded in the capital markets.
Recent prices are debenture @ Rs 110, Preference shares @ Rs.120 & equity @ Rs
22.
Anticipated external financing opportunities are;
Rs 100 per debenture redeemable at par; 20 year maturity, 8% coupon rate, 4%
flotation Costs, sale price Rs 100
Rs 100 preference share redeemable at par: 15 yrs maturity, 10% dividend rate 5%
Flotation Costs, sales price Rs 100
Equity shares Rs 2 per share flotation costs, sales price Rs 22. In addition, the
dividend. Expected on the equity share at the end of the year Rs 2. per share, the
anticipated growth Rate in dividend is 5% & company pay all its earnings in the
form of dividend. Tax rate is 50%
Question 28. Hindustan Ltd has paid up equity capital 600000 equity share of Rs.10 each.
The current market price of share is Rs 24. During the current year, the company has declared a
Dividend of Rs.6 per share. The company has also previously issued 14% irredeemable
Preference share of Rs.10 each aggregating to Rs.30 lakhs and 13% 50000 debentures of Rs.100
Each. The company’s corporate tax rate is at 40%, the growth in dividends on equity share is
Expected at 5%. In case of preference share the company has received only 95% of the face value
Of shares after deducting issue expenses. Calculate the weighted average cost of capital.
Q29. M/S WXY ltd has the following capital structure:
10% Debenture ₹300000
9% preference shares ₹200000.
Equity 5000 shares of ₹100 each ₹500000
The equity shares of the are quoted at ₹102 and the company is expected to declare a
dividend of ₹9 per share which is expected to grow at the rate of 5%. Assuming the tax
rate applicable to the company is 50%
a. calculate the weighted average cost
b. If the company raise additional term loan at 12% for ₹500000 to finance its expansion
plan calculate the revised WACC. The company’s assessment is that it will be in position to
Increase the dividend from ₹9 per share to ₹10 per share, but the business risk
associated. With the new financing way bring down the market price from ₹102 to ₹96
per share's

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