Corporate Finance

Cost of Capital

Q.1:The capital structure of Rock Ltd.as at 1st January, 2015 is as follows:

Rs.in million

Issue ordinary shares (Rs.50 shares) 500

6% debentures 700

11% bank term loan 500

The ordinary shares have a current market price of Rs.200 each. The dividend for 2014 has just been paid.
Dividend per share in the five preceding years was as follows:

Year Dividend

2010 Rs.6.8

2011 Rs.7.2

2012 Rs.8.8

2013 Rs.9.6

2014 Rs.10.4

Dividends are paid once a year and are expected to grow in future at the same annual rate as they have
since 2010.The preferred stock has a market price of Rs.90.Redemption will be at par in four years time.
The company pays corporation tax at a rate of 30%.

Required:

Estimate the cost of capital of Rock Ltd.

Q.2: The summarized statement of financial position of D Ltd.at June 30, 2009 was as follows:

Assets Rs. ‘000’

Noncurrent assets 15,350

Current assets 5,900

Total assets 21,250

Equity and liabilities

Ordinary shares (Rs.10) 2,000

7% Preference shares (Rs.10) 1,000

Share premium 1,100

Retained earnings 6,550

Total equity 10,650

Long term liabilities: 5% debentures 8,000

Current liabilities 2,600

Total equity & liabilities 21,250

The current price of the ordinary shares is Rs.54 ex-dividend. The dividend of Rs.4 is payable during the
next few days. The expected rate of the dividend is 9% per annum. The current price of the preference
shares is Rs.7.7 and the dividend has recently been paid. The debenture interest has also been paid
recently and the debentures are currently trading at Rs.80 per Rs.100 nominal. Corporate tax is at the rate
of 30%.

Required:

Calculate the entity’s WACC, using the respective market values as weighting factors.

Q.3: ThefollowingfigureshavebeenextractedfromthemostrecentaccountsofCrescentLtd.:
StatementofFinancialPosi
tionason31stDecember20
11
Assets Rs.’000’ Liabilitiesandowner’sequity Rs.’000’
Currentassets 6,850 Currentliabilities 3,500
Investments 1,650 7%TFCs 6,600
Fixedassets 20,500 10,100
Shareholders’equity:
600,000
ordinaryshares(Rs.10 6,000
Retainedearnings 12,900
18,900
Total 29,000 Total 29,000

Summary of five (05)yearsprofitsanddividendsfortheyearended31stDecember:

 Rs.’000’
2007 2008 2009 2010 2011
Profit afterinterest 3,582 4,308 4,000 3,846 4,492
Less 35%tax 1,254 1,508 1,400 1,346 1,572
Profit aftertax 2,328 2,800 2,600 2,500 2,920
Lessdividends 1,240 1,360 1,480 1,480 1,620
Addedtoretainedearnings 1,088 1,440 1,120 1,020 1,300

The current (1st January 2012) market value of Crescent Ltd.’s ordinary
share(cumdividend) is Rs.32.70 per share. An annual dividend of Rs.1,620,000 is
due forpaymentshortly. The 7% TFCs are redeemable at par at maturity after ten
years.
Theircurrentmarketvalueis75%ofrecordedvalue.Annualinteresthasjustbeenpaidont
heTFCs.There have been no issues or redemptions of ordinary shares and
debentures duringthepast fiveyears.

Required:
Calculate the WACC (weighted average cost of capital) for appraising
newinvestmentopportunitiesassumingnochangeinthetaxrateduringthelastfiveyears.