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Problem:-

J K brought public offer & has the following capital structure

                                  Qty                Rate             Rs
1) Equity                     5, 00,000 shares       20               1,00,00,000
2) 8% Preference              3, 00,000 shares       10                30,00,000
3) 10% Debentures             4,00,000 deb           15               60,00,000

Loan of Rs 35 lacs with interest at 12 %p.a.
The dividend on equity will increase from Rs 5 to Rs 8/ share.


 Solution :-

According to the books of Account

Source         Amount        Weight     After Tax           Weight    Weighted Cost
                             Amount
                                (a)            (b)            (a*b)
Equity         1,00,00,000   0.52       0.25                0.13      24,70,000
Preference     30,00,000     0.16       0.08                0.01      1,90,000
Share
Debentures     60,00,000     0.32       0.10                0.032     6,08,000
               1,90,00,000                                            32,68,000

Cost of Capital (Equity)
Dividend = Rs 5/ Share
Par Value = Rs 20/ Share

5/20 * 100 = 25%

Weighted cost of Capital

                                        17.2%        32, 68,000/1, 90, 00,000 * 100 =




After taking Loan
Source         Amount          Weight         After Tax       Weight         Weighted
                               Amount            (b)                         Cost
                                   (a)                          (a * b)
Equity         1,00,00,000     0.45           0.4             0.18           40,50,000
Preference     30,00,000       0.14           0.08            0.0112         2,52,000
Share
Debentures     60,00,000       0.27           0.10            0.027          6,07,500
Loan           35,00,000       0.14           0.12            0.0168         3,78,000
               2,25,00,000                                                   52,87,500

Cost of Capital (Equity)
Dividend = Rs 8/ Share
Par Value = Rs 20/ Share

8/20 * 100 = 40%

Weighted cost of Capital

52, 87,500 / 2, 25, 00,000 * 100 =        23.5%

Weighted average cost of capital after taking loan is more than that not having a loan
borrowed.

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Cost project

  • 1. Problem:- J K brought public offer & has the following capital structure Qty Rate Rs 1) Equity 5, 00,000 shares 20 1,00,00,000 2) 8% Preference 3, 00,000 shares 10 30,00,000 3) 10% Debentures 4,00,000 deb 15 60,00,000 Loan of Rs 35 lacs with interest at 12 %p.a. The dividend on equity will increase from Rs 5 to Rs 8/ share. Solution :- According to the books of Account Source Amount Weight After Tax Weight Weighted Cost Amount (a) (b) (a*b) Equity 1,00,00,000 0.52 0.25 0.13 24,70,000 Preference 30,00,000 0.16 0.08 0.01 1,90,000 Share Debentures 60,00,000 0.32 0.10 0.032 6,08,000 1,90,00,000 32,68,000 Cost of Capital (Equity) Dividend = Rs 5/ Share Par Value = Rs 20/ Share 5/20 * 100 = 25% Weighted cost of Capital 17.2% 32, 68,000/1, 90, 00,000 * 100 = After taking Loan
  • 2. Source Amount Weight After Tax Weight Weighted Amount (b) Cost (a) (a * b) Equity 1,00,00,000 0.45 0.4 0.18 40,50,000 Preference 30,00,000 0.14 0.08 0.0112 2,52,000 Share Debentures 60,00,000 0.27 0.10 0.027 6,07,500 Loan 35,00,000 0.14 0.12 0.0168 3,78,000 2,25,00,000 52,87,500 Cost of Capital (Equity) Dividend = Rs 8/ Share Par Value = Rs 20/ Share 8/20 * 100 = 40% Weighted cost of Capital 52, 87,500 / 2, 25, 00,000 * 100 = 23.5% Weighted average cost of capital after taking loan is more than that not having a loan borrowed.