MODULE – 3
COST OF CAPITAL
(PRACTICE PROBLEMS)
Cost of Debt
1. A company issues 12% debentures of face value Rs. 1,000 at a 10% discount.
Flotation cost is 3%.
If the tax rate is 25%, calculate the after-tax cost of debt.
2. XYZ Ltd. issues 9% bonds with a face value of Rs. 500 at Rs. 460. Flotation cost is
Rs. 5 per bond.
Corporate tax rate is 30%.
Find the after-tax cost of debt.
3. A firm issues 11% debentures of face value Rs. 1,000 at a premium of 8%. Flotation
cost equals 2% of the issue price.
Given the tax rate of 35%, compute the after-tax cost of debt.
4. ABC Industries issues 13% debentures worth Rs. 1,000 at Rs. 920. Flotation cost is
4%.
If the tax rate is 28%, determine the after-tax cost of debt.
5. A company issues 10.5% bonds with a face value of Rs. 2,000 at Rs. 1,900. Flotation
cost is Rs. 30 per bond.
Tax rate applicable is 22%.
Find the after-tax cost of debt.
6. PQR Ltd. issues 8% debentures of face value Rs. 1,000 at a 5% premium. Flotation
cost is 1%.
Corporate tax rate is 32%.
Calculate the after-tax cost of debt.
7. A firm issues 14% debentures with a face value of Rs. 1,500 at Rs. 1,350. Flotation
cost is 3% of face value.
Given the tax rate of 30%, compute the after-tax cost of debt.
8. Sunrise Ltd. issues 9.5% bonds having a face value of Rs. 1,000 at Rs. 940. Flotation
cost equals Rs. 20 per bond.
Tax rate is 33%.
Determine the after-tax cost of debt.
9. A company issues 11.5% debentures (face value Rs. 800) at Rs. 760. Flotation cost
is 2% of issue price.
The corporate tax rate is 25%.
Calculate the after-tax cost of debt.
10. Delta Ltd. issues 10% debentures of face value Rs. 1,200 at a 12% discount.
Flotation cost is Rs. 15 per debenture.
Tax rate applicable is 40%.
Find the after-tax cost of irredeemable debt
Cost of Preference Shares
1. A company issues 14% preference shares of face value Rs. 100 at an issue price of Rs. 95.
The flotation cost is Rs. 3 per share.
Calculate the cost of preference capital (irredeemable).
2. XYZ Ltd. issues 12% preference shares of face value Rs. 120 at a 10% premium. The
flotation cost is Rs. 4 per share.
Find the cost of preference shares.
3. A firm issues 10% preference shares of face value Rs. 150 at Rs. 140.
Compute the cost of preference capital.
4. PQR Ltd. issues 15% irredeemable preference shares with a face value of Rs. 200 at an
issue price of Rs. 180. Flotation cost is Rs. 5 per share.
Calculate the cost of preference shares.
5. Sunrise Ltd. issues 12.5% redeemable preference shares of face value Rs. 100 at Rs. 92.
Determine the cost of preference capital.
Cost of Equity
1. ABC Ltd. has just paid a dividend of Rs. 5 per share. The dividend is expected to
grow at 6% per year. The current market price of the share is Rs. 80.
Calculate the cost of equity using the Dividend Growth Model.
2. MRL Industries paid a current dividend of Rs. 3.50. Dividends are expected to grow
at 8% annually. The share price in the market is Rs. 60.
Find the cost of equity.
3. Classic Textiles Ltd. paid a dividend of Rs. 4.20 last year. The expected growth rate
of dividends is 5%. The current market price of the share is Rs. 72.
Compute the cost of equity under the Dividend Growth Model.
4. A company paid a dividend of Rs. 6 per share recently. The firm expects dividends
to grow at an annual rate of 7%. If the market price of the share is Rs. 110,
calculate the cost of equity.
5. SmartTech Ltd. just paid a dividend of Rs. 2.80. Dividends are expected to grow at
9% per year indefinitely. The share currently sells for Rs. 45.
Determine the cost of equity using the Dividend Growth Model.
Weighted Average Cost of Capital (WACC)
1. ABC Ltd. has the following capital structure:
Equity: Rs. 6,00,000 (Cost of equity = 14%)
Preference Shares: Rs. 2,00,000 (Cost of preference capital = 10%)
Debt: Rs. 4,00,000 (cost of debt = 9%)
Calculate the WACC of the company.
2. XYZ Ltd. is financed through:
Equity: Rs. 10,00,000 (Cost = 15%)
Debt: Rs. 5,00,000 (Cost of debt = 12%)
Preference Shares: Rs. 3,00,000 (Cost = 11%)
Compute the firm’s weighted average cost of capital.
3. Sunrise Industries has the following financing:
Equity: Rs. 8,00,000 (Cost of equity = 16%)
Debt: Rs. 6,00,000 (cost = 10%)
Retained earnings: 60,0,000 (Cost 16%)
Determine the company’s WACC.
4. Modern Builders Ltd. capital consists of:
Equity: Rs. 12,00,000 (Cost = 13%)
Preference Capital: Rs. 4,00,000 (Cost = 9%)
Debt: Rs. 4,00,000 (Cost of debt = 11%)
Calculate the WACC.
5. TechPro Ltd. uses the following capital mix:
Equity: Rs. 5,00,000 (Cost of equity = 18%)
Debt: Rs. 3,00,000 (cost of debt = 9%)
Preference Shares: Rs. 2,00,000 (Cost of preference shares = 12%)
Find the weighted average cost of capital for the firm.
