Cost of Capital

1.) XYZ Ltd is interested in measuring its cost of specifc types of

capital, as well as its overall cost. The fnance department of the
company indicates that the following costs would e associated
with the sale of deentures, preference shares and e!uity shares.
The corporate ta" rate is #$%.
1. &eentures' The company can sell 1$ years 1(% &eentures
of the face
value of )s. 1,*** for )s. +,*. -n addition, an underwriting
fee of 1.$% of the face value would e incurred in the
process.
.. /reference shares' 1$% /reference shares, having a face
value of )s. 1**, can e sold at a premium of 1*%, an
underwriting fee of )s. . per share is to e paid to the
underwriters.
#. 0!uity shares' The 1ompany2s e!uity shares are currently
selling for )s. 1.$ per share. -t has to pay )s. 1$ per share
as dividend at the end of the coming year. -ts dividend
payments over the past 3 years per share are given elow'
Year Dividend (Rs.)
1 1*.3*
. 11..(
# 11.+1
( 1..3.
$ 1#.#4
3 1(.1+

5ar6et value 758) and oo6 value 798) for each type of capital
are as follows'
Book Value (Rs.) Market value
(Rs.)
Long term det 14,**,*** 1+,#*,***
/reference :hares (,$*,*** $,.*,***
0!uity shares 3*,**,***
)etained earnings 1$,**,*** 1,**,**,***
97,50,000 ,!",50,000
i) 1alculate the specifc cost of each source of fnancing.
ii) &etermine the weighted average cost of capital using 7a)
98 weights, and 7) 58 weights.
..) Y Ltd. wishes to determine the weighted average cost of capital
for evaluating capital udgeting pro;ects. You have een supplied
with the following -nformation to calculate the value of <
*
for the
company.
Balan#e s$eet as on Mar#$ %
&ia'ilities Rs. (ssets Rs.
1urrent liailities +,**,*** :undry
assets
#+,**,***
&eentures +,**,***
/reference shares (,$*,***
0!uity shares 1.,**,***
)etained earnings (,$*,***
%9,00,000 %9,00,000
0
=nticipated e"ternal fnancing information'
i) .* years, 4% deentures, of )s, .,$** face value
redeemale at $% premium, sold at par .% >otation costs.
ii) 1*% /reference shares' :ale price, )s. 1** per share, .%
>otation costs.
iii) 0!uity shares' :ale )s. 11$ per share, >otation costs
would e )s. $ per share.
iv) The corporate ta" rate is #$% and, e"pected e!uity
dividend, growth is $% per year. The e"pected dividend at
the end of the current fnancial year is )s. 11 per share.
3.) ABC Ltd provides you the following specific cost of capital along
with the indicated Book and Market value weights:
Capital Types
Weights
Cost Book value Market
value
!uity shares 1"# $.%$ $.%"
1%# &reference 'hares ( $.) $.1*
1+# ,e-entures ( $.3 $.)%
Calculate the .ACC taking -ook and /Market 0alue weights. 1ake
2nco3e 1a4 rate 5 +$#.

+.) 6ro3 the following capital structure of a Ltd. co3pany you are
en!uired to calculate over all cost of capital using 71) Book
value weights 7)) Market value weights.
Source Book
value
Market value
Rs. Rs.
!uity share capital 78s. 1$9:
shares)
+%;$$$ <$;$$$
8etained arning 1%;$$$ :
&reference shares capital 1$;$$$ 1$;$$$
,e-entures 3$;$$$ 3$;$$$
1he after 1a4 cost of different sources is as follows:
!uity 'hare Capital 1+#
8etained arning 13#
&reference 'hare Capital; 1$#
,e-entures %#
%.) =>? Ltd. has the following -ook value capital structure:
!uity Capital 7in shares of 8s. 1$ each fully
paid up at par)
8s. 1% crores
11# &reference Capital 7in shares of 8s. 1$$
each fully paid up at par)
8s. 1 crores
8etained arnings 8s. )$ crores
13.%# ,e-entures 7of 8s. 1$$ each) 8s. 1$ crores
1%# 1er3 Loans 8s. 1).%
crores
1. 1he ne4t e4pected dividend an e!uity shares per share is
8s. 3.@$ the dividend per share is e4pected to grow at the
rate of *#. 1he 3arket price per share is 8s. +$.
). &reference stack; redee3a-le after ten years; is currently
selling at 8s. *% per share.
3. ,e-entures; redee3a-le after si4 years; are selling at 8s. "$
per de-enture.
+. 1he 2nco3e:ta4 rate for the; co3pany is +$#.
i) 8e!uire3ent:
Calculate the weighted average cost of capital using
7a) Book value proportions and
7-) Market value proportions
ii) ,efine the weighted 3arginal cost of capital schedule for
the co3pany; 2f 2t raises 8s. 1$ cores ne4t year; given the
following 2nfor3ation:
7a) 1he a3ount will -e raised -y e!uity and de-t in
e!ual proportions:
7-) 1he co3pany e4pects to retain 8s. 1.% crores
earnings ne4t year.
7c) 1he additional issue of e!uity shares will result 2n the
net price per share -eing fi4ed at 8s. 3).
7d) 1he de-t capital raised -y way of ter3 loans will cost
1%# for the first 8s. ).% crores and 1@# for the ne4t
8s. ).% crores.