Problems

Financial Management

Practice Problem

Cost of Capital

1. A 5 years Rs.100 debenture of a firm can be sold for a net price of 96.50. The coupon rate
of interest is 14% p.a. and it will be redeemed at 5% premium on maturity. The firm tax
rate is 40%. Compute after-tax cost of debenture.

2. A Company issues 10000 10% preference shares of Rs. 100 each redeemable after 10
years at a premium of 5%. Calculate the cost of preference capital.

3. A company issues 1000 7% preference shares of Rs. 100 each at a premium of 10%
redeemable after 5 years at par. Compute the cost of preference capital.

4. Dell Ltd. has Rs.100 preference share redeemable at a premium of Rs.10% with 15 years
maturity. The coupon rate is 12%. Sale price is Rs.95. calculate the cost of preference
shares.

5. The share of a company is selling at Rs. 40 per share and it had paid a dividend of Rs. 4
per share last year. The investors market expects a growth rate of 5% per year. Compute
the cost of equity.

6. Sun Ltd. has its share of Rs. 10 each quoted at Rs.24 on the stock exchange. The last
dividend paid Rs.1.60. The subsequent growth in dividends is expected at the rate of
10%. Calculate the cost of equity capital.

7. The equity of mercury Ltd. is traded in the market at Rs. 90 each. The expected current
year dividend per share is Rs.18. The subsequent growth in dividends is expected at the
rate of 6%. Calculate the cost of equity capital.

8. XYZ Ltd. has the following book value Capital Structure (Rs in crores)
Equity Capital (Rs. 10 each fully paid) 15
11% Preference Shares (Rs.100 each fully paid) 1
Retained earnings 20
13.5% Debenture 10
15% term loan 12.5
The next expected dividend on equity shares per share is Rs.3.60 and the dividend per
share is expected to grow at the rate of 7%. The market price per share is Rs.40.
Preference stock, redeemable after six years, is currently selling at Rs.75 per share.
Debentures, redeemable after six years, are selling at Rs. 80 per debenture.
The income tax for the company is 40% .Calculate WACC.

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9. The Capital Structure of Hindustan Traders Ltd. as on 31-03-2010 is as follows:
Equity Capital (Rs. 10 each fully paid) 1000000
12% Preference Shares (Rs.100 each fully paid) 200000
14% Debenture(Rs.100 each fully paid) 300000
For the year ended 31-03-2010 the company has paid equity dividend at 20%. As the
company is a market leader with good future, dividend is likely to grow b 5% every year.
The equity shares are now traded at Rs.80per share in the stock exchange. Preference
stock, redeemable after 10 years, is currently selling at Rs.95 per share Debentures,
redeemable after 5 years, are selling at Rs. 90 per debenture.
Income tax rate applicable to the company is 50%. You are required to
a) The weighted cost of capital on the basis of book value.
b) The company plans to raise Rs.500000 by a way of long term loan at 16%. When
this takes place the market value of the equity shares is expected to fall Rs.70 per
share. What will be the new WACC of the company?