COST OF CAPITAL

1) Reliance Ltd., required additional finance for this it has been decided to issue 1,000 9%
Debentures of Rs. 500 at par redeemable after 8 years. The cost of issue is estimated to be as
follows :-
a) Under writing commission 1.5 %
b) Brokerage 0.5%
c) Printing and other expenses Rs. 10,000.
Calculate the after-tax cost of debenture assuming that the corporate tax rate is 35%.

2) Akshay Ltd., wants to issue of 9% debentures of Rs. 500 each. The debentures are to be
redeemed after 10 years. The company will pay the following issue expenses :-
a) Under writer commission 1%.
b) Brokerage 0.5%
c) Printing and stationery Rs. 5,000.
Calculate the Cost of Debt Capital (Before tax as well as After tax). If the debentures are issued
at (i) par (ii) 10% discount (iii) 10% premium. Assume corporate tax rate at 35%.

3) Compute the after-tax cost of 14% debentures from the following data, which are
redeemable after 10years.
No. of debentures issued :- 1,000
Face value :- Rs. 100
Issue price :- Rs. 90
Redeemable price :- Rs. 105
Floatation cost :- Rs. 2,000
Tax rate :- 35%.

4) Pankaj Ltd., issues 10,000, 10% debentures of Rs. 100 each at a discount of 5%, the cost of
floatation cost at 2%. The rate of tax applicable to the company is 35%. Compute the cost of
debt capital before and after tax.

5) Nikhil & Co. Ltd., wishes to issue 1,000, 10% debentures of Rs. 100 each for which the
company will be required to incur following expenses :-
a) Underwriter commission 2%
b) Brokerage 0.5%
c) Printing and other expenses Rs. 15,000
Calculate cost of debt capital (before and after tax) assuming the debt is issued (i) at par (i) at
10% discount and (iii) at 10% premium. The tax rate is 35%.

6) Himanshu Ltd., wants to issue 1,000, 10% Preference share of Rs. 100 each, redeemable
after 10 years at par. The expenses of capital issue are :- Underwriter commission 2%.
Brokerage 1% and Printing expenses Rs. 1,000.
Calculate the cost of capital if the shares are issued at (i) at par (ii) at 5% discount and (iii) at
10% premium. What will be the effect on cost of capital if corporate tax rate is 35%.

7) Amit Ltd., issued 1,00,000 10% preference share of Rs. 100 each at par redeemable after
10 years at a premium of 5%. The cost of issue is at par 2%.
Calculate the cost of preference share capital & assume 35% tax rate.

8) 15% preference share of Rs. 10 each issued at Rs. 95 and is redeemable after 5 years at Rs.
105. Calculate the cost of capital.

9) Dev Ltd., has Rs. 100 preference share redeemable at a premium of 10% with 15 years
maturity. The dividend rate is 12% , Floatation cost is 5%.
Calculate the cost of Preference share capital.

10) Ankush Ltd., issued 1,000, 10% preference share of Rs. 100 each. Cost of issue is Rs. 2
per share. Calculate cost of preference share capital if these shares are issued :- (i) at par (ii)
at 5% premium (iii) at 2% discount. Assume tax rate 35%.

11) Value of share of par Rs. 10 each ; Market price Rs. 18 each share ; Rate of divided 45%.
Calculate cost of equity share capital.

12) Fully paid-up equity share issued Rs. 10 lakh each Rs. 1 ; market value Rs. 2.50 each ;
earning after tax and preference divided Rs. 2,00,000. Calculate cost of equity share capital.

13) Share value at par Rs. 10 each ; Dividend paid Rs. 3.60 each ; Market price Rs. 18 each ;
Dividend growth rate is 5%. Calculate cost of equity share capital.

14) Calculate Cost of Equity Share Capital if 1,00,000 equity share of Rs. 10 each issued at
Rs. 16. Issue expenses Rs. 1 each. Dividend Rs. 3 each.

15) Agrawal Ltd., was issued 1,00,000 equity shares of Rs. 10 each as fully paid. The company
has earned a profit of Rs. 3,00,000 after tax. On these shares divided has been paid at the rate
of Rs. 2 per share. Market price Rs. 25 each shares.
Find out the cost of equity capital using dividend yield method and earning yield method.

16) Mahesh Ltd., is thinking of raising funds by the issuance of equity capital. The company
has paid dividend in past years as follows :- Rs. 1 per share ; Rs. 1.10 per share ; Rs. 1.21 per
share ; and Rs. 1.33 per share.
The current market price of the company share is Rs. 19. The company is expected to pay a
dividend of Rs. 1.50 per share next year. The floatation cost per share is Rs. 1.
Calculate the cost of new issue.

17) The share of Kalpesh Ltd., is quoted in the market at Rs. 25 currently. The company pays
a dividend of Rs. 2 per share and the investor expects a growth rate of 6% per year.
Calculate :-
a) The company cost of capital.
b) If the anticipated growth rate is 5% p.a. calculate the indicated market price per share.
c) If the company cost of capital is 10% and the anticipated growth rate is 4%, calculate
the indicated market price if the dividend of Rs. 2 per share is to be maintained.

18) Present market price of share is Rs. 40, expected dividend is Rs. 4.20 , dividend growth
rate is 5%, floatation cost is expected to be Rs. 3 per share.
Calculate cost of equity and cost of Reserve.

19) Find out the cost of retained earnings from the following information :-
Dividend per share :- Rs. 9.00
Personal income tax rate :- 30%
Personal capital gain tax rate :- 20%
Market price per share :- Rs. 100.

20) Find out the cost of retained earnings from the following information :-
Dividend per share :- Rs. 15.00
Personal income tax rate :- 30%
Market price per share :- Rs. 110.
Brokerage on investment of dividend :- 1%

21) Find out the cost of retained earnings from the following information :-
Current market price of a share :- Rs. 25
Cost of floatation / brokerage per share :- 0.25%
Growth in expected dividend :- 5%
Expected dividend per share on new shares :- Rs. 2.50
Shareholder marginal / personal income tax :- 30%

22) Ratanlal Ltd., cost of equity capital is 10% and tax rate of its majority shareholder is 30%.
It is expected that 10% is brokerage charge which investors will pay while investing their
dividends in alternative equal investment opportunity. Calculate the cost of retained earnings.

23) The capital structure and after tax cost of capital of the specific source of a company is as
follows :-
Particulars Amount Cost of capital
Debt 3,00,000 4.77%
Preference capital 2,00,000 10.53%
Equity capital 4,00,000 14.59%
Retained earnings 1,00,000 14.00%
Calculate the weighted average cost of capital.
24) Capital structure of Amit Limited is as per below :-
Particulars Amount
Equity share ( Rs. 10 each ) 20,00,000
Retained earnings 10,00,000
9% Preference shares ( Rs. 100 each ) 5,00,000
12% Debenture ( Rs. 100 each ) 15,00,000
The equity share of the company sales for Rs. 30. It is expected that company will pay dividend
of Rs. 3 per share this year. Corporate tax rate is 35%. Assume 30% as income tax rate of
individual shareholder. Compute the Weighted average cost of capital of existing capital
structure.

25) Pawar Ltd., has the following capital structure :-

Particulars Amount
Equity share capital (2,00,000 shares) 20,00,000
7% Preference share 10,00,000
8% Debenture 20,00,000
The market price of the company equity share is Rs. 20. It is expected that company will pay
a current dividend of Rs. 2 per share which will grow at 5% for ever. The tax rate may be
presumed at 35%. You are required to compute the following :-
a) A weighted average cost of capital based on existing capital structure.
b) The new weighted average cost of capital if the company raises an additional Rs.
30,00,000 debt by issuing 10% debt. This would result in increasing the expected
dividend to Rs. 3 and leave the growth rate unchanged but the market price of share will
fall to Rs. 15 per share.

26) The following information is available with regard to the capital structure of a company:-
Particulars Amount After tax Cost of capital
Equity share capital 3,50,000 0.12
Retained earnings 2,00,000 0.10
Preference share capital 1,50,000 0.13
Debentures 3,00,000 0.09
You are required to calculate the Weighted Average cost of capital.

27) Calculate the Weighted Average cost of capital from the following information :-
Particulars Amount
4,000 Equity share capital (fully paid up ) 4,00,000
3,000 6% Debenture 3,00,000
2,000 6% Preference Share 2,00,000
Retained earnings 1,00,000
Earning per equity share has been Rs. 1 during the past years and equity share is being sold in
the market at par. Assume corporate tax rate at 35% and shareholders tax liability is 30%.
28) Jatin Ltd., has obtained capital from the following sources, the specific costs are also noted
down against them :-
Sources of capital Book value (Rs) Market value (Rs) Cost of capital (after tax)
Debentures 4,00,000 3,80,000 6.5%
Preference share 1,00,000 1,20,000 8.0%
Equity share 10,00,000 20,00,000 12.0%
Retained earnings 5,00,000 8.4%
You are required to calculate Weighted average cost of capital using – Book value and Market
value.

29) From the following capital structure of Prince Ltd., find out the weighted average cost of
capital using – Book value and Market value.
Sources of capital Book value (Rs) Market value (Rs) Cost of capital (after tax)
Equity share capital 45,000 1,80,000 10.00
(Rs. 10 shares)
Retained earnings 45,000 ---- 7.00
Preference share capital 30,000 33,000 10.00
Debentures 20,000 27,000 5.2

30) Arjun Ltd., has the following capital structure ( Rs. are in lakhs)
Particulars Cost % Market value
Equity share capital 18 80
Preference share capital 15 30
Debentures 14 40
Calculate weighted average cost of capital on the basis of market value.