Capital Cost, exercises

Exercise 1.
Mr. Prudence runs a profitable retail business of sports apparel and footwear located in a centric
district of the capital. One of his suppliers of sports shoes charges him €30 for each pair of shoes
if Mr. Prudence pays at 30 days, but when he does it at sight (immediately), then the supplier
applies a discount of 10%. What is the annual cost of this trade credit?

Exercise 2.
A manufacturer of sports equipment needs to buy raw material worth 100 million of euros to be
paid in 2 years. If the manufacturer pays at sight, he will have 20% of discount. The company
doesn’t have enough funds, so as alternative to this trade credit the manufacturer is thinking
about applying a 2-year bank loan to be able to pay the supplier at sight. The bank charges
interest at 10% (the principal should be paid at the end of the second year), besides that, the
bank charges 500.000 euros as opening commission. What source is more preferable?

Exercise 3.
A company, that applies for a 2-year loan with 15% of interest, wants to know its real annual
cost. The tax on the company’s profit is of 35% and the inflation rate expected for the coming 2
years is of 8%.

Exercise 4.
The shares of Fit&Fun are traded at 300 m.u. each and the shareholders expect profit generation
ad infinitum, that is, they would get steady dividends at 150 m.u. annually. The partition
coefficient is of 10%. What is the cost of equity shares of Fit&Fun?
Exercise 5.
If the nominal cost of the bonds issued by one company at 5 years is of 9% and the tax rate is of
35%, what is the real cost the bonds’ issuance implied?

Exercise 6.
The company Forever has distributed the dividends of 4 eur per share. The market expects that
this dividend will grow at average annual rate of 4%. If the market price of the shares of Forever
were of 50 eur, what will be the shares’ cost for the company (that is, what will be the
performance required by the shareholders)?

Exercise 7.
The company Z use external and internal sources of financing: debt through loans which is €3,5
M with annual cost of 10% and equity which is €10 M at annual cost of 14%. Determine the
weighted average cost of capital before taxes and after taxes and inflation (tax rate = 35% and
inflation = 6%).