This document discusses various methods for calculating the cost of capital for companies, including: - Calculating the before-tax and after-tax cost of debt for corporate bonds issued at a discount. - Using the Gordon growth model to calculate the required rate of return for shareholders given the current share price, expected dividend, and constant dividend growth rate. - Using a two-stage dividend growth model to calculate a company's cost of equity based on current share price, initial dividend, growth rates over two periods, and a terminal growth rate. - Calculating the cost of internal and external equity using dividend growth rates and issue prices for new shares. - Using the Capital Asset Pricing Model

1. Cost of Capital

2. Cost of Debenture

3. Borrowing arrangement
Issued @ Par, Premium or
Discount
Obligates the issuer to make
specified payments
Debenture
Cost of Debentures

4. Straight Bonds
Plain vanilla bonds
Fixed Interest
Zero Coupon
Bonds
Steep discount
No Interest
Floating Rate
Bonds
Linked to a
benchmark rate
Bonds with
Embedded
Options
Convertible
Callable
Puttable
Commodity-Linked
Bonds
Price of a certain
commodity
1 2 3 4 5
Corporate Bonds

5. A company decides to sell a new issue of 7 year 15 per cent bonds of `100 each at discount rate of 94 and
will pay `100 principal to bondholders at maturity, Calculate the before-tax cost of debt. If the Corporate tax
rate is 35% what is the after tax cost of debt?
Cost of Debenture

9. Cost of Preference
Share

10. Cost of Term Loan

11. Cost of Equity &
Valuation
1. Dividend Discount Model
2. CAPM

12. Zero Growth Model

13. Constant Growth Model (Gordon Model)
Suppose that the current market price of a company’s share is `90 and the expected
dividend per share next year is `4.50. If the dividends are expected to grow at a constant
rate of 8 per cent, What is the shareholders’ required rate of return?

14. Two Stage Growth Model
Assume that a company’s share is currently selling for `134. Current dividends, DIV0 are `3.50 per share and are
expected to grow at 15 per cent over the next 6 years and then at a rate of 8 per cent forever. Find out the
company’s cost of equity.

16. Cost of Internal and External Equity
The share of a company is currently selling for `100. It wants to finance its capital expenditures of
`100 million either by retaining earnings or selling new shares. If the company sells new shares,
the issue price will be `95. The dividend per share next year, DIV1, is `4.75 and it is expected to
grow at 6 per cent. Calculate (i) the cost of internal equity (retained earnings) and (ii) the cost of
external equity (new issue of shares).

17. CAPM

18. Suppose in the year 2022 the risk-free rate is 6 per cent, the market risk premium is 9 per cent and
beta of L&T’s share is 1.54. Calculate cost of Equity.

19. WACC
THE WEIGHTED AVERAGE COST OF CAPITAL