Name: Srisha Kadambi Section:B PRN NO: 12020841103

Sessions 9, 10, 11, 12 Cost of Capital:Where I am taking money from and how much charges included, we also did the capital structure and cost of capital of one company, there are some numerical which we learnt in this topic, the component of cost of capital are Debt Common equity Weighted average cost of capital In order to calculate the After tax cost of capital=Interest rate (1-t) Companies take more loans where taxes are very high in order to avoid some part of tax, rather than funding through equity they fund it through loans

In this class we studied the concept of cost of capital, In order to run a business you need ready cash either as working capital or otherwise. And the very function of financial manager is Determination of sources and the second part is cost of capital, i.e, finding out the interest rate or the cost involved in acquiring the cash to the organisation. Cash can be acquired in two ways one through equity another through long term debt, the main decision involved here is to find out the ratio in which the capital to be acquired i.e., Equity: long term debt If we denote We= Weight-age to equity Wd= Weight-age to Debt Ke=Interest rate of equity Kd=interest rate of debt

Then the weighted average cost of capital is WACC=WdKd+WeKe Where We+Wd=1 Then we got the concept of reducing cost of capital by acquiring long term loans so that to avoid certain amount of interest on loan. If a company acquires loan and pays certain percentage of tax on profit then the effective rate of interest can be calculated through this formula. Effective cost of debt=interest rate (1-tax rate) In the same lines if one wants to calculate the effective cost of bond or debenture after considering the tax rate redeemable value issued value etc then the formula used is as follows Effective cost of bond or debenture= [interest amount per bond(1-tax rate)+(redeemable value-issue value)/no of years to maturity]/(redeemable value + issue value)/2

Now let us take an example Debenture is sold at face value redeemed at face value=100 Floatation cost 5% of issue value Years of maturity=10yrs Tax rate=30% Interest rate=10% Ans:[10(1-0.3) + (100-95)/10]/(100+95)/2=7.69% Perpetual debenture is a debenture where a certain amount of money is credited to you on a regular basis where the concept of number of years doesnt comes into picture. Then the formula changes as follows

I (1-tax)+(RV-IV)/(RV+IV)/2

Cost of equity:Generally we feel that there is no cost involved in acquiring equity funding but as a matter of fact, we must keep in mind that there is a certain amount of cost involved in acquiring equity funding which can be calculate as below, this is not the best way to calculate but this is the only way to calculate P0= D0 (1+g)/(i-g) Where g is growth rate of dividend I cost of equity The formula can be rewritten as follows I= D0 (1+g)/P0+g And the formula to calculate growth rate is Growth rate=ROE (1-p) ROE=return on equity P=payout ratio Which is nothing but out of your earning how much you are paying (the ratio) =DPS/EPS DPS=dividend per share EPS=Earnings per share