Bharadwaj Institute Private Limited Mob: 9841537255

COST OF CAPITAL

82. X Ltd. has 10% perpetual debt of ₹1,00,000. The tax rate is 35 %. Determine the
cost of capital (before tax as well as after tax) assuming the debt is issued at
(i) par, (ii) 10% discount, and (iii) 10% premium.

83. Five years ago, KPM Ltd issued 12% irredeemable debentures at ₹ 105, a ₹ 5
premium to their par value of ₹ 100. The current market price of these debentures
is ₹ 95. If the company pays corporate tax at a rate of 35 % what is its current cost
of debenture capital?
84. XYZ Limited keeps a perpetual fixed amount of debt in its books. It pays coupon of
15%. Its debt sells at par in the market. What is the cost of debt if the firm pays
35% tax? What is the cost of debt if it sells (a) at 5% premium (b) at 5% discount
to the face value?
85. ABC Ltd. issued 5,000, 12% debentures of ₹ 100 each at a premium of 10% on
1.4.2016 to be matured on 1.4.2021. The debentures will be redeemed on
maturity. Compute the cost of debentures assuming 35% as tax rate.
86. PQR Ltd. issued 5,000, 12% debentures of ₹100 each on 1.4.2016 to be matured
on 1.4.2021. The market price of the debenture is ₹ 80. Compute the cost of
existing debentures assuming 35% tax rate.
87. Rima & Co. has issued 12% debenture of face value ₹ 100 for ₹ 10 lakh. The
debenture is expected to be sold at 5% discount. It will also involve flotation cost
of ₹ 5 per debenture. The debentures are redeemable at a premium of 5% after
10 years. Calculate the cost of debenture if the tax rate is 50%.
88. X Ltd. is proposing to sell a 5-year bond of ₹ 10,000 at 10 % rate of interest per
annum. The bond amount will be amortised equally over its life. What is the
bond’s present value for an investor if he expects a minimum rate of return of 6
%?
89. RR Ltd. issued 10,000, 12% convertible debentures of ₹100 each with a maturity
period of 5 years. At maturity, the debenture holders will have the option to
convert the debentures into equity shares of the company in the ratio of 1:10 (10
shares for each debenture). The current market price of the equity shares is ₹14
each and historically the growth rate of the shares are 5% per annum. Compute
the cost of debentures assuming 35% tax rate.
90. BP Ltd. issued 60,000 12% Redeemable Preference Share of ₹100 each at a
premium of ₹ 5 each, redeemable after 10 years at a premium of ₹ 10 each. The
floatation cost of each share is ₹ 3. You are required to calculate cost of preference
share capital ignoring dividend tax.

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Bharadwaj Institute Private Limited Mob: 9841537255

91. Y Co. Ltd. issues 10,000 12% preference shares of ₹ 100 each at a premium @ 10%
but redeemable at a premium @ 20% after 5 years. The company pays under
writing commission @ 5%. If tax on dividend is 12.5%, surcharge is 2.5% and
education cess is 3%, calculate the cost of preference share capital.
92. Simond Ltd. issues 10% irredeemable preference share of ₹ 100 each for ₹
10,00,000. What will be the cost of preference share capital (kp ), if preference
shares are issued: (i) at par, (ii) at 10% premium and (iii) at 10% discount. Assume
that there is no dividend distribution tax.
93. MNC Ltd. paid dividend per share of ₹ 4 and the current market price of equity
share is ₹ 20. Calculate the cost of equity share capital ke .
94. AB Ltd. issued shares of ₹ 100 each at a premium of 10%. The issue involved
underwriting commission of 5%. The rate of dividend expected by the
shareholders is 12%. Determine the cost of equity capital (ke ).
95. The earnings available to the shareholders amount to ₹ 40,000. Firm is
represented by 10,000 equity shares and the current market price of equity share
is ₹ 25. Calculate the cost of equity share capital.
96. Calculate the Cost of Capital from the following cases:
i. 10-year 14% Preference shares of Rs.100, redeemable at premium of 5%
and flotation costs 5%. Dividend tax is 10%.
ii. An equity share selling at Rs.50 and paying a dividend of `6 per share, which
is expected to continue indefinitely.
iii. The above equity share if dividends are expected to grow at the rate of 5%.
iv. An equity share of a company is selling at `120 per share. The earnings per
share is Rs.20 of which 50% is paid in dividends. The shareholders expect
the company to earn a constant after tax rate of 10% on its investment of
retained earnings.
97. Mamon Ltd. is expected to earn ₹ 30 per share. Company follows fixed payout
ratio of 40%. The market price of its share is ₹200. Find the cost of existing equity
if dividend tax of 15 % is imposed on the distributed earnings when:
(a) current level of dividend amount is maintained. (b) dividend to the
shareholders is reduced by the extent of dividend tax.
98. XYZ Company’s share is currently quoted in the market at ₹ 20. The company pays
a dividend of ₹ 2 per share and the investors expect a growth rate of 5% per year.
You are required to calculate (a) cost of equity capital of the company and (b) the
market price per share if the anticipated growth rate dividend is 7%.

Mohammad Asthaf Anathan FCMA, CS Page 41 of 106

Bharadwaj Institute Private Limited Mob: 9841537255

99. Using Dividend Growth Model, calculate cost of equity (ke ) in the following case:
Equity share capital (shares of ₹10 each) ₹ 2,00,000 Earnings for 2021 ₹ 60,000
Current market price per share ₹ 180
Divident Per Share (₹)
2018 7
2019 8
2020 10
2021 11
100. From the following information, determine the cost of equity capital using
the CAPM approach.
a. Required rate of return on risk-free security, 8%.
b. Required rate of return on market portfolio of investment is 13%.
c. The firm’s beta is 1.6.
101. The beta coefficient of Target Ltd. is 1.4. The company has been maintaining
8 % rate of growth in dividends and earning. The last dividend paid was ₹4 per
share. The return on government securities is 10 % while the return on market
portfolio is 15 %. The current market price of one share of Target Ltd. is ₹ 36.
102. Calculate the cost of equity capital of Mamon Ltd., whose risk free rate of
return equals 10%. The firm’s beta equals 1.75 and the return on the market
portfolio equals to 15%.
103. If the risk free rate of return and the market rate of return of an investment
are 14% and 18% respectively, calculate the cost of equity share capital if (a) β=1,
(b) β= 2/3 and (c) β=5/4.
104. From the following information in respect of a company, you are required
to calculate the cost of equity using CAPM approach:
(a) Risk-free rate of return 12%
(b) Expected market price of equity shares at the year end is ₹ 1,400
(c) Initial price of investment in equity shares of the company is ₹ 1,200
(d) Beta risk factor of the company is 0.70
(e) Expected dividend at the year end is ₹ 140
105. A firm’s ke (return available to shareholders) is 10%, the average tax rate of
shareholders is 30% and it is expected that 2% is brokerage cost that shareholder
will have to pay while investing their dividends in alternative securities. What is
the cost of retained earnings?
106. AKS Ltd. retains ₹10,00,000 out of its current earnings. The expected rate of
return to the shareholders, if they had invested the funds elsewhere is 10%. The
brokerage is 2% and the shareholders come in 30% tax bracket. Calculate the cost
of retained earnings.

Mohammad Asthaf Anathan FCMA, CS Page 42 of 106

Bharadwaj Institute Private Limited Mob: 9841537255

107. AKS Ltd. has the following capital structure on October 31, 2021:
Source of Capital (₹)
Equity Share Capital (1,00,000 shares 10,00,000
of ₹10 each)
Reserve & Surplus 10,00,000
12% Preference Shares 5,00,000
9% Debentures 15,00,000
40,00,000
The market price of equity share is ₹ 50. It is expected that the company will pay next
year a dividend of ₹ 5 per share, which will grow at 7% forever. Assume 30% income
tax rate. You are required to compute weighted average cost of capital using market
value weights.

108. Asianol Ltd. has the following Capital Structure: ₹ (in Lakhs)
Equity Share Capital (10 lakhs shares) 100

12% Preference Share Capital (10,000 shares) 10

Retained Earnings 120 14% Debentures 120

14% Debentures (70,000 Debentures) 70

14 % Term Loan 100

Total 400

The market price per equity share is ₹ 25. The next expected dividend per share is
₹ 2 and is expected to grow at 8%. The preference shares are redeemable after 7
years at per and are currently quoted at ₹ 75 per share. Debentures are
redeemable after 6 years at per and their current market quotation is ₹ 90 per
debenture. The tax rate applicable to the firm is 50%.

109. The capital structure and cost of capital of a company are given below:
Source Book Value (₹/lakh) After tax cost of capital
(%)
Equity 200 16
Retained Earnings 200 ?
Debentures 400 7
800
Equity shares represent shares of ₹10 each. The current market value of each
share is ₹ 80 and the corporate tax rate is 40%.

Mohammad Asthaf Anathan FCMA, CS Page 43 of 106

Bharadwaj Institute Private Limited Mob: 9841537255

(i) Compute weighted average cost of capital of the company using both book
values and market values as weights.

(ii) How would you account for the difference, if any, in the average cost of capital
under (i) above?

110. The following is the capital structure of ABC Ltd. as on 31.12.2021

Sources of Finance (₹ )
Equity Shares: 5,000 shares (of ₹100 5,00,000
each)
10% Preference Shares (of ₹100 each) 2,00,000
12% Debentures 3,00,000
10,00,000
The market price of the company’s share is ₹ 110 and it is expected that a dividend
of ₹ 10 per share would be declared for the year 2021. The dividend growth rate is
6%:

(i) If the company is in the 40% tax bracket, compute the weighted average cost of
capital.

(ii) Assuming that in order to finance an expansion plan, the company intends to
borrow a fund of ₹5 lakhs bearing 14% rate of interest, what will be the company’s
revised weighted average cost of capital? This financing decision is expected to
increase dividend form ₹10 to ₹12 per share. However, the market price of equity
share is expected to decline form ₹ 110 to ₹105 per share.

111. XYZ Ltd. has the following book value capital structure:
Equity Capital (in share of ₹ 10 each, ₹30 crore
fully paid up at par)
10% Preference Capital (in shares of ₹ ₹2 crore
100 each, fully paid up at par)
Retained Earnings ₹40 crore
14% Debentures ( of ₹ 100 each) ₹ 20 crore
15% Term Loans ₹ 25 crore

Mohammad Asthaf Anathan FCMA, CS Page 44 of 106

Bharadwaj Institute Private Limited Mob: 9841537255

The next expected dividend on equity shares per share is ₹ 3.60; the dividend per
share is expected to grow at the rate of 5%. The market price per share is ₹30.
Preference stock, redeemable after six years, are selling at ₹ 80 per debenture.
The income tax rate for the company is 30%.

(i) Required to calculate the current weighted average cost of capital using:
(a) Book value proportions; and
(b) Market value proportions
(ii) Determine the weighted marginal cost of capital schedule for the company, if
it raises ₹20 crores next year, given the following information:
(a) The amount will be raised by equity and debt in equal proportions;
(b) The company expects to retain ₹ 3 crores earning next year;
(c) The additional issue of equity shares will result in the net price per share being
fixed at ₹25.
(d) The debt capital raised by way of term loans will cost 15% for the first ₹5 crores
and 16% for the next 5 crores.
112. A financial consultant of Hypothetical Ltd. recommends that the firm should
estimate its cost of equity capital by applying the capital asset pricing model rather
than the dividend yield plus growth model. He has assembled the following facts:
(i) Systematic risk of the firm is 1.4.
(ii) 182-days treasury bills currently yield, 8 %.
(iii) Expected yield on the market portfolio of assets is 13 %.
Determine the cost of equity capital based on the above data.
113. The following facts relate to Hypothetical Ltd:
Risk-free interest in the market is 10 %.
The firm’s beta coefficient, b, is 1.5.
Determine the cost of equity capital using the capital asset pricing model, assuming
an expected return on the market of 14 % for next year. What would be the ke , if
the b (a) rises to 2, (b) falls to 1.

Mohammad Asthaf Anathan FCMA, CS Page 45 of 106

Bharadwaj Institute Private Limited Mob: 9841537255

114. Avon Electricals Ltd wishes to determine the weighted average cost of
capital for evaluating capital budgeting projects. You have been supplied with the
following information to calculate the value of k0 for the company:
Balance sheet as on March 31, 2021

Liabilities (₹) Assets (₹)

Current liabilities 9,00,000 Sundry assets 39,00,000

Debentures 9,00,000

Preference shares 4,50,000

Equity shares 12,00,000

Retained earnings 4,50,000

39,00,000 39,00,000

Anticipated external financing information:

(i) 20 years, 8% Debentures of ₹ 2,500 face value, redeemable at 5 % premium,
sold at par, 2% flotation costs.
(ii) 10 % Preference shares: Sale price ₹ 100 per share, 2% flotation costs.
(iii) Equity shares: Sale price ₹ 115 per share; flotation costs would be ₹ 5 per share.
(iv) The corporate tax rate is 35% and expected equity dividend growth is 5% per
year. The expected dividend at the end of the current financial year is ₹11 per
share. Assume that the company is satisfied with its present capital structure and
intends to maintain it.
115. From the following information, determine the appropriate weighted
average cost of capital (WACC), relevant for evaluating long-term investment
projects of the company.
Cost of equity 0.18
After tax cost of long-term debt 0.08
After tax cost of short-term debt 0.09
Sources of capital Book value (BV) Market value (MV)
Equity 5,00,000 7,50,000
Long-term debt 4,00,000 3,75,000
Short-term debt 1,00,000 1,00,000
10,00,000 12,25,000

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Bharadwaj Institute Private Limited Mob: 9841537255

116. ABC company sold ₹ 1,000, 6 % debentures carrying no maturity date to the
public a decade earlier. Interest rates since have risen, so that debentures of the
quality represented by this company are now selling at 9 % yield basis.
(a) Determine the current indicated market price of the debentures. Would you
buy the debentures for ₹700? Explain your answer.
(b) Assuming that debentures of the company are selling at ₹ 850, and if the
debentures have 8 years to run to maturity, compute the approximate effective
yield an investor would earn on his investment?
117. The shares of a textile company are selling at ₹20 per share. The firm had
paid ₹2 per share dividend last year. The estimated growth of the company is
approximately 5 % per year.
a. Determine the cost of equity capital of the company.
b. Determine the estimated market price of the equity shares if the anticipated
growth rate of the firm (i) rises to 8 % (ii) falls to 3 %.
Determine the market price of the company assuming a growth rate of 20 %. Are
you satisfied with your calculations?
118. Assuming a corporate tax rate of 35 %, compute the after-tax cost of the
capital in the following situations:
a. A perpetual 15 % debentures of ₹1,000, sold at the premium of 10 % with no
flotation costs.
b. A ten year 14 % debenture of ₹2,000, redeemable at par, with 5 % flotation
costs.
c. A ten year 14 % preference share of ₹100, redeemable at premium of 5 %, with
5 % flotation costs.
d. An equity share selling at ₹ 50 and paying a dividend of ₹6 per share, which is
expected to be continued indefinitely
e. The same equity share (that is, described in situation (d), if dividends are
expected to grow at the rate of 5 %.
f. An equity share, selling at ₹120 per share, of a company that engages only in
equity financing. The earning per share is ₹ 20 of which 50 % is paid in dividends.
The shareholders expect the company to earn a constant after-tax rate of 10 % on
its investment of retained earnings.

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Bharadwaj Institute Private Limited Mob: 9841537255

119. From the following information supplied to you, determine the appropriate
weighted average cost of capital, relevant for evaluating long-term investment
projects of the company:
Cost of equity 12 %
After-tax cost of long-term debt 7 %
After-tax cost of short-term loans 4 %
Source of Capital Book value (₹) Market value (₹)
Equity 5,00,000 7,50,000
Long-term debt 4,00,000 3,75,000
Short-term debt 1,00,000 1,00,000
TOTAL 10,00,000 12,25,000

120. From the given data, calculate the cost of equity shares of X Ltd. Current
market price of the share is ₹ 120. Floatation cost per share is ₹ 5. Dividend paid
on outstanding shares for the past three years is as shown in following Table:
Year Dividend Paid (₹)
2019 10.5
2020 12.5
2021 14.5
The expected dividend on the new shares at the end of the current year is ₹15
per share.
121. B Ltd. has equity stock with a listed beta of 1.35. The estimated market
return is 12% and the risk-free rate based on government bonds is 6.5%. Calculate
the cost of its equity based upon the CAPM.
122. Assume that Rf is 9% and Rm is 18%. If a security has a beta factor of: (a)1.4;
(b)1.0 and (c) 2.3, determine the expected return of the security.
123. From the following information, calculate weighted average cost of capital
of the company considering (i) Book value as weights and (ii) Market value as
weights.
Cost of equity 0.18
After tax cost of long-term debt 0.08
After tax cost of short-term debt 0.09
Cost of Reserve 0.15

Element BV (₹) MV (₹)

Capital 3,00,000 4,50,000
Reserve 2,00,000 3,00,000
L/T debt 4,00,000 3,75,000

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Bharadwaj Institute Private Limited Mob: 9841537255

124. Aries Limited wishes to raise additional finance of Rs.10 lacs for meeting its
investment plans. It
has Rs.2,10,000 in the form of retained earnings available for investment purposes.
The following are the further details:

Debt/ equity mix 30% / 70%

Cost of debt upto Rs.1,80,000 , 10% (before tax) beyond Rs.1,80,000 16%
(before tax)
Earnings per share Rs.4
Dividend payout 50% of earnings
Expected growth rate in dividend 10%
Current market price per share Rs.44
Tax rate 50%
You are required to:

To determine the pattern for raising the additional finance.

To determine the post-tax average cost of additional debt.

To determine the cost of retained earnings and cost of equity, and

Compute the overall weighted average after tax cost of additional finance .

Mohammad Asthaf Anathan FCMA, CS Page 49 of 106