COST OF DEBT (KD)

1. If a company has issued Rs.1,00,000 , 10% debentures at par and tax rate is 50%,
find out the before tax and after tax cost of debt.
2. A company issues 10% irredeemable debentures of Rs.50,000. Compute the cost
of debt if debentures are issued
i. at Par
ii. at 10% Discount
iii. at 10% Premium.
3. A Company issues 3000, 8% irredeemable debentures of Rs.100 each. The
corporate tax rate is 40%. Find out the cost of debt before tax and after tax, if
debentures are issued at i. at Par, ii. at 10% Discount
iii. at 10% Premium.
4. ABC Ltd. issued Debentures of Rs.100 each at a discount of 10%, bearing interest
at 10%. If the company is in 30% tax bracket, Calculate the cost of debt assuming
issue expenses of 10% of the face value of debentures.
5. A ltd. issued Rs.10,00,000 ,12% debentures at a discount of 5%. The cost of
floatation amount to Rs.42,000. The debentures are redeemable after 5 years.
Calculate before tax and after tax cost of debt assuming a tax rate of 30%.
6. A 6 years Rs.100 debentures of a firm can be sold for a net price of Rs.97.50. The
coupon rate of interest is 13%. Per annum, and the debentures will be redeemed at
5 % premium on maturity. The firms tax rate is 35 % compute the cost of
debenture.
7. Assuming that a firm pays tax at 40% rate, Compute the cost off debt capital in
the following cases:
i) a perpetual bond sold at par, coupon rate of interest being 8%.
ii) a 10 year , 7% 1000 per bond sold at Rs.950 less 4% underwriting commission.
8. Details of redeemable Debentures of 4 different companies are given below. Issue
expenses are given as a percentage of net sale proceeds. Debentures of all the
companies are redeemable after 4 years and carry a uniform interest rate of 12%.
Calculate cost of debentures of each company.
Company FV Discount Premium Issue Tax Redemption
Rs. (%) (%) expenses rate Premium
(%) (%)
A 100 - 20 5 40 10
B 10 10 - 15 30 10
C 100 10 - 10 20 20
D 100 - 20 10 0 -

WEIGHTED AVERAGE COST OF CAPITAL

1. From the following data calculate WACC by using market value and Book value
weights.
Type of capital Book value Rs. Market value Rs. After tax cost
(%)
Debt 2,00,000 1,90,000 5
 Preference share 50,000 55,000 8
Equity share 3,00,000 6,00,000 13
Total 5,50,000 8,45,000

2. The following information has been extracted from the Balance sheet of Veda
Ltd. as on 31-12-2023
Particulars Rs. In lakhs
Equity share capital 500
12% Debentures 500
18% Term Loan 800
Total 1,800
a) Determine the weighted average cost of capital of the company. If it had been
paying dividend at a consistent rate of 20% per annum.
b) What difference will it make, if the current price of the Rs.100 share is Rs.200?
c) Determine the effect of income tax on the cost of Capital under both the
premises. (Tax rate is 30%)

3. From the following data calculate WACC by using market value and Book value
weights.
Type of capital Book value Rs. Market value Rs. After tax cost
(%)
Debt 1,00,000 95,000 5
Preference share 25,000 28,000 8
Equity share 1,50,000 1,60,000 13
Total 2,75,000 2,83,000
4. Cost of equity shares of a company was 8% on its equity share capital of
Rs.2,00,000 . Preference share capital amounted to1,50,000 with a cost at 12%.
Redeemable debentures amounted to Rs.4,00,000 with the cost at 7% . Calculate
weighted average cost of capital.
5. A firm has the following capital structure and after tax costs for the different
sources of funds used. Compute WACC using book value and market value
weights. Also compute the market value weighted average cost of capital of the
firm 9000 equity shares of 100 each outstanding and the current market price is
Rs.200 per shares and the market value of debt and preference shares are the
same.

Source of funds Amount Proportion (%) After tax cost

(%)
Preference share 6,00,000 20 10
Equity shares 9,00,000 30 12
Retained earnings 7,50,000 25 11
Debt 7,50,000 25 5
Total 30,00,000 100