Problems on Unit 5 : Cost of Capital

Problem 1:
Z Ltd has following Capital Structure and their after tax costs
Amount After tax costs
Equity Capital 4,00,000 15.6%
Retained Earnings 3,00,000 15%
Preference Shares 1,00,000 10.5%
Debentures 2,00,000 4.5%
------------
10,00,000
Problem 2:
Regal Reform Ltd has following Capital Structure and their costs
Book Value Market Value Costs
Equity Capital 60,000 1,20,000 13%
Retained Earnings 20,000 ------ 9%
Preference Shares 10,000 11,000 8%
Debentures 40,000 38,000 5%
------------ ----------
1,30,000 1,69,000
You are requested to determine WACC using:
a] Book Value as Weights b]Market Value as weights

Problem 3:
Manju Ltd has following Capital Structure and their costs
Mkt Val Book Value Costs
Equity Capital 14,00,000 11,00,000 18%
15% Pref share 15,00,000 15,00,000 15%
10% Loan 10,00,000 10,00,000 7%
12% Debentures 16,00,000 14,00,000 8.4%
------------ --------------
55,00,000 50,00,000
You are requested to determine WACC using:
a] Book Value as Weights b]Market Value as weights

Problem 4:
Company P Ltd. Issues 12% 2000 Debentures of Rs.100 each & Company Q ltd. Issues 15% 3000 Debentures
of Rs.100 each.
The Debentures are redeemable after 8 years .Both companies are in tax bracket of 30% Calculate cost of debt
after tax for both the companies if debentures are issued at :
i] Par ii] 10% Discount iii]10% Premium

Problem 5:
Calculate the Market Value of the given 4 firms Alpha,Bravo ,Charlie and Delta from the foll details.
Assume Tax rate as Nil, Interest rate as 12%
Firm EBIT Interest Equity Capitalisation Rate
Alpha 3,00,000 30,000 10%
Bravo 4,00,000 70,000 15%
Charlie 6,00,000 3,00,000 12%
Delta 7,00,000 3,40,000 16%
Also calculate WACC for each firm
Problem 6:
A Ltd has following Capital Structure
Amount
Equity Capital [4,00,000 shs] 80,00,000
6% Preference Shares 20,00,000
8% Debentures 60,00,000
------------
1,60,00,000
The Share of the co. sells for Rs.20.It is expected that company will pay next year a dividend of Rs.2 per share
which will grow @7% forever. Assume a tax rate of 35%
Compute: a] WACC based on existing capital structure
b]Compute the new WACC if the company raises additional Rs.40,00,000 by debt by issuing 10%
debentures. This would result in increasing the expected dividend to Rs.3 and leave the growth
rate unchanged, but the price of the share will fall to Rs.15 per share.
c] Compute Cost of capital if in b] above growth rate increase to 12%

Problem 7:
A Ltd has following Capital Structure
Amount
Equity Capital [100 each] 5,00,000
9% Preference Shares 2,00,000
10% Debentures 3,00,000
------------
10,00,000
The Share of the co. sells for Rs.102.It is expected that company will pay is expected to declare a dividend of
Rs.9 per share Assume a tax rate of 50%
Compute: a] WACC based on existing capital structure
b]Compute the new WACC if the company raises additional Rs.5,00,000 by term loan at 12%
debentures. This would result in increasing the expected dividend to Rs.10 and leave the growth
rate unchanged, but the price of the share will fall to Rs.96 per share.

Problem 8:
E Ltd has a total capital of Rs.75,00,000 as follows
15% Debt 30%
12% Pref. Capital 10%
Cost of Retained Earnings 10%
Equity Capt and Retained Earnings are in ratio 3:1
All shares and debt are in units of Rs.100 each. Applicable tax rate is 40%
Equity Shareholders expect dividend @15%
You are required to ascertain:
a] Composite [combined] Cost of Capital
b] If EBIT is Rs.15,00,000 calculate i]EPS & ii] Market price per equity share

===============================================================================