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Financing Decision-Cost of Capital - Problem Sheet Irredeemable Debt

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47 views4 pages

Financing Decision-Cost of Capital - Problem Sheet Irredeemable Debt

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v4bwr4pnfm
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financing Decision- Cost of Capital- Problem sheet

Irredeemable Debt:
1. A company has 15% debt of Rs. 1,00,000. The tax rate is 30%.
Determine the cost of capital (before and after tax) assuming the
debt is issued (a) at par (b) at 10% discount (c) at 10% premium
Practice:
2. Five years ago, Tech Ltd. Issued 12% irredeemable debentures
having face value of Rs. 100 at Rs 103 each. The current market
price of these debentures is Rs. 94. If the company pays corporate
tax rate at 35% what is its current cost of capital?
Redeemable Debt:
3. A company issues a new 15% debenture of Rs. 1000 face value to
be redeemed after 10 years. The debentures are expected to be
sold at 5% discount.
It will also involve flotation cost of 5%. The company’s tax rate is
30%. What would be the cost of debt?
Practice:
4. A company issues 25000, 14% debentures of 1000 Rs. Each. The
debentures are redeemable after the expiry period of 5 years. Tax
rate applicable to the company is 35%. Calculate the cost of debt
after tax if debentures are issued at 5% discount with 2% flotation
cost.
5. A company issues Rs. 10,00,000 12% debentures of Rs. 100 each.
The debentures are redeemable at par after 7 years. The company’s
tax rate is 35%. Required:
i. Calculate the cost of debt after tax, if debentures are issued
at (a) par (b) 10% discount (c) 10% premium
ii. If brokerage is paid at 2%, what will be the cost of debentures,
if the issue at par?
Irredeemable Preference shares:
6. A company issues 14% irredeemable preference shares of the face
value of Rs. 100/- each. Floatation costs are estimated to be about
5% of the expected sale price. What is the cost of preference

Dr. Nirmala Joseph


shares, if they are issued at (a) par value (b) 10% premium or (c)
5% discount?

Practice:

7. XYZ & Co, issues 2000, 10% Preference Shares of Rs. 100/- each at
Rs. 95/- each. Calculate the cost of Preference Shares.

8. If R Energy is issuing Preferred Stock at Rs. 100/- per share, with a


stated dividend of Rs.12/- and a floatation cost of 3% then, what is
the cost of Preference Share?

Redeemable Preference Shares:

9. ABC Ltd. has issued 14% preference shares of the face value of rs.
100/- each to be redeemed after 10 years. Floatation cost is
expected to be 5%. Determine the cost of preference shares.

Practice:
10. XYZ Ltd. issues 2000, 10% Preference Shares of Rs. 100/- each
at Rs. 95/- each. The company proposes to redeem the Preference
Shares at the end of 10th year from the date of issue. Calculate the
cost of Preference Shares.

Cost of Equity:

11. Earnings per share of AAM Ltd. For the year 2018-19 is ₹20.
The board has decided to retain 40% of its earnings. Return on
equity for the year is 15%. Both earnings and dividends are
expected to grow at the same rate in the forthcoming years. If the
current market price of the share is ₹240, calculate:
a. Growth rate of the company
b. Cost of equity under earnings growth model
c. Cost of equity under dividend growth model

Dr. Nirmala Joseph


12. H Ltd. wishes to compute cost of equity based on CAPM
model. Based on its analysis, Risk free rate of return of the company
is 10%; the beta of the firm equals 1.5 and markets give a return of
12.5%. Compute Cost of Equity Capital.
13. SK Limited has obtained funds from the following sources, the
specific cost are also given against them:

Source of Funds Amount Cost of Capital


Rs
Equity Share 30,00,000 15%
Preference Shares 8,00,000 8%
Retained Earnings 12,00,000 11%
Debentures 10,00,000 9% (pre-tax)

You are required to calculate the Weighted Average Cost of Capital.


Assume that Corporate tax rate is 30%.

Practice:

14. The capital structure of a company consists of equity shares of


Rs. 50 lakhs; 10% preference shares of Rs. 10 lakhs and 12%
debentures of Rs. 30 lakhs. The cost of equity capital for the
company is 14.7% and income-tax rate for this company is 30%.
You are required to calculate Weighted Average Cost of Capital.

Practice:

15. The following details are provided by the GPS Limited:

Particulars Amount
Equity Share Capital 65,00,000
12% Preference Share Capital 12,00,000
15% Redeemable Debentures 20,00,000

Dr. Nirmala Joseph


10% Convertible Debentures 800,000

The cost of equity capital for the company is 16.3% and Income-tax
rate for the company is 30%. You are required to calculate Weighted
Average Cost of Capital (WACC) of the company.

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Dr. Nirmala Joseph

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