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    Ex. Cost of Capital-2021

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    Geethika Nayanaprabha
    1. A company issued 10% debentures at a 5% discount to raise Rs. 20,00,000 with floatation costs of Rs. 50,000 redeemable after 8 years. Calculate pre-tax and post-tax cost of debt assuming a 35% tax rate. 2. XYZ Ltd issued 8% preference shares of Rs. 100 each. Calculate cost of preference share capital if issued at par or at a 10% premium with issue costs of Rs. 2 per share. 3. ABC Ltd issued 8% preference shares of Rs. 100 each redeemable at a 10% premium after 8 years. Calculate cost of preference share capital with issue costs of Rs. 2 per share.

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    Ex. Cost of Capital-2021

    Uploaded by

    Geethika Nayanaprabha
    21 views2 pages
    1. A company issued 10% debentures at a 5% discount to raise Rs. 20,00,000 with floatation costs of Rs. 50,000 redeemable after 8 years. Calculate pre-tax and post-tax cost of debt assuming a 35% tax rate. 2. XYZ Ltd issued 8% preference shares of Rs. 100 each. Calculate cost of preference share capital if issued at par or at a 10% premium with issue costs of Rs. 2 per share. 3. ABC Ltd issued 8% preference shares of Rs. 100 each redeemable at a 10% premium after 8 years. Calculate cost of preference share capital with issue costs of Rs. 2 per share.

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    11. Ex. cost of capital-2021

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    1. A company issued 10% debentures at a 5% discount to raise Rs. 20,00,000 with floatation costs of Rs. 50,000 redeemable after 8 years. Calculate pre-tax and post-tax cost of debt assuming a 35% tax rate. 2. XYZ Ltd issued 8% preference shares of Rs. 100 each. Calculate cost of preference share capital if issued at par or at a 10% premium with issue costs of Rs. 2 per share. 3. ABC Ltd issued 8% preference shares of Rs. 100 each redeemable at a 10% premium after 8 years. Calculate cost of preference share capital with issue costs of Rs. 2 per share.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    21 views2 pages

    Ex. Cost of Capital-2021

    Uploaded by

    Geethika Nayanaprabha
    1. A company issued 10% debentures at a 5% discount to raise Rs. 20,00,000 with floatation costs of Rs. 50,000 redeemable after 8 years. Calculate pre-tax and post-tax cost of debt assuming a 35% tax rate. 2. XYZ Ltd issued 8% preference shares of Rs. 100 each. Calculate cost of preference share capital if issued at par or at a 10% premium with issue costs of Rs. 2 per share. 3. ABC Ltd issued 8% preference shares of Rs. 100 each redeemable at a 10% premium after 8 years. Calculate cost of preference share capital with issue costs of Rs. 2 per share.

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    Exercises(cost of capital)

    1. A company issues Rs. 20,00,000, 10% redeemable debentures at a discount of


    5%. The costs of floatation amount to Rs. 50,000. The debentures are redeemable
    after 8 years. Calculate before tax and after tax. Cost of debt assuring a tax rate of
    35%.
    2. XYZ Ltd. issues 20,000, 8% preference shares of Rs. 100 each. Cost of issue is
    Rs. 2 per share. Calculate cost of preference share capital if these shares are
    issued (a) at par, (b) at a premium of 10%
    3. ABC Ltd. issues 20,000, 8% preference shares of Rs. 100 each. Redeemable after
    8 years at a premium of 10%. The cost of issue is Rs. 2 per share. Calculate the
    cost of preference share capital.

    4. The earnings, dividends, and stock price of Carpetto Technologies Inc. are
    expected to grow at 7% per year in the future. Carpetto’s common stock sells for
    Rs. 23 per share, its last dividend was Rs. 2.00, and the company will pay a
    dividend of Rs. 2.14 at the end of the current year.
    a. Using the discounted cash flow approach, what is its cost of equity?
    b. If the firm’s beta is 1.6, the risk-free rate is 9 percent, and the expected
    return on the market is 13 percent, what will be the firm’s cost of equity
    using the CAPM approach?

    5. The Manx Company was recently formed to manufacture a new product. It has the
    following capital structure in market value terms:

    Debentures Rs. 6,000,000


    Preferred stock 2,000,000
    Common stock (320,000 shares) 8,000,000
    16,000,000

    The company has a marginal tax rate of 40 percent. A study of publicly held
    companies in this line of business suggests that the required return on equity is about
    17 percent. (The CAPM approach was used to determine the required rate of return.)
    The Manx Company’s debt is currently yielding 13 percent, and its preferred stock is
    yielding 12 percent. Compute the firm’s present weighted average cost of capital.

    6. Cohn and Sitwell, Inc., is considering manufacturing special drill bits and other
    equipment for oil rigs. The proposed project is currently regarded as complementary to
    its other lines of business, and the company has certain expertise by virtue of its
    having a large mechanical engineering staff. Because of the large outlays required to
    get into the business, management is concerned that Cohn and Sitwell earn a proper
    return. Since the new venture is believed to be sufficiently different from the
    company’s existing operations, management feels that a required rate of return other
    than the company’s present one should be employed.

    The financial manager’s staff has identified several companies (with capital structures

    1
    similar to that of Cohn and Sitwell) engaged solely in the manufacture and sale of oil
    drilling equipment whose common stocks are publicly traded. Over the last five years,
    the median average beta for these companies has been 1.28. The staff believes that 18
    percent is a reasonable estimate of the average return on stocks “in general” for the
    foreseeable future and that the risk-free rate will be around 12 percent. In financing
    projects, Cohn and Sitwell uses 40 percent debt and 60 percent equity. The after-tax
    cost of debt is 8 percent.
    a. On the basis of this information, determine a required rate of return for the
    project, using the CAPM approach.
    b. Is the figure obtained likely to be a realistic estimate of the required rate of return
    on the project?

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