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Amity Business School
1
Amity Business School
Semester II
FINANCIAL MANAGEMENT
MODULE III
Cost of Capital
Amity Business School
Question 1. The capital structure of zoom ltd is as follows:
Source Book Value Market Value
Equity Share 10,00000 20,00000
Retained Earnings 500000 -
14% Preference share 700000 700000
12% Debenture 600000 600000
After tax cost of these different sources is:
Equity share capital 18%
Retained Earnings 15%
Preference Share Capital 14%
Debenture 8%
Calculate the weighted average cost of capital (Book Value Based)
Question 2. Good Bad Ltd has a gearing of 30%. The cost of equity is computed at 21% and
The cost of debt is 14%. The Corporate tax rate is 40%
Calculate WACC of the company.
Amity Business School
Question 3. Hindustan Ltd has paid up equity capital 600000 equity share of Rs.10 each.
The current market price of share is Rs 24. During the current year, the company has declared a
Dividend of Rs.6 per share. The company has also previously issued 14% irredeemable
Preference share of Rs.10 each aggregating to Rs.30 lakhs and 13% 50000 debentures of Rs.100
Each. The company’s corporate tax rate is at 40%, the growth in dividends on equity share is
Expected at 5%. In case of preference share the company has received only 95% of the face value
Of shares after deducting issue expenses. Calculate the weighted average cost of capital.
Question 4. The capital Structure of Trading Corporation ltd is as follows:
Equity Capital: 100 lakhs equity shares of Rs.10 each 10 cr
Reserves 2 cr
14% Debenture of Rs 100 each 3 cr
For the current year company is planning to pay dividend of 20%. As the company is a market
Leader with good future, dividend is likely to grow by 5%. The equity shares are now treated at
Rs.80 per share in the stock market. Income tax rate applicable to the company is 50%
You are required to calculate
i.The current weighted cost of capital
ii.The company has plan to raise a further Rs 5 crore by way of long term loan at 16% interest.
When this takes place the market value of the equity share is expected to fall to Rs.50 per share.
What will be the new weighted average cost of capital of the company?
Amity Business School
Question 5. M/S WXY ltd has the following capital structure :
10% Debenture 300000
9% preference shares 200000
Equity 5000 shares of Rs.100 each 500000
The equity share of the are quoted at Rs.102 and the company is expected to declare a dividend
Of Rs.9 per share which is expected to grow at the rate of 5%
i . Assuming the tax rate applicable to the company is 50% calculate the weighted average cost
ii. If the company raise additional term loan at 12% for Rs.500000 to finance its expansion plan
calculate the revised WACC. The company’s assessment is that it will be in position to
Increase the dividend from Rs.9 per share to Rs.10 per share, but the business risk associated
With the new financing way bring down the market price from Rs.102 to Rs.96 per share.sss

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Lecture 17. cost of capital questions

  • 1. Amity Business School 1 Amity Business School Semester II FINANCIAL MANAGEMENT MODULE III Cost of Capital
  • 2. Amity Business School Question 1. The capital structure of zoom ltd is as follows: Source Book Value Market Value Equity Share 10,00000 20,00000 Retained Earnings 500000 - 14% Preference share 700000 700000 12% Debenture 600000 600000 After tax cost of these different sources is: Equity share capital 18% Retained Earnings 15% Preference Share Capital 14% Debenture 8% Calculate the weighted average cost of capital (Book Value Based) Question 2. Good Bad Ltd has a gearing of 30%. The cost of equity is computed at 21% and The cost of debt is 14%. The Corporate tax rate is 40% Calculate WACC of the company.
  • 3. Amity Business School Question 3. Hindustan Ltd has paid up equity capital 600000 equity share of Rs.10 each. The current market price of share is Rs 24. During the current year, the company has declared a Dividend of Rs.6 per share. The company has also previously issued 14% irredeemable Preference share of Rs.10 each aggregating to Rs.30 lakhs and 13% 50000 debentures of Rs.100 Each. The company’s corporate tax rate is at 40%, the growth in dividends on equity share is Expected at 5%. In case of preference share the company has received only 95% of the face value Of shares after deducting issue expenses. Calculate the weighted average cost of capital. Question 4. The capital Structure of Trading Corporation ltd is as follows: Equity Capital: 100 lakhs equity shares of Rs.10 each 10 cr Reserves 2 cr 14% Debenture of Rs 100 each 3 cr For the current year company is planning to pay dividend of 20%. As the company is a market Leader with good future, dividend is likely to grow by 5%. The equity shares are now treated at Rs.80 per share in the stock market. Income tax rate applicable to the company is 50% You are required to calculate i.The current weighted cost of capital ii.The company has plan to raise a further Rs 5 crore by way of long term loan at 16% interest. When this takes place the market value of the equity share is expected to fall to Rs.50 per share. What will be the new weighted average cost of capital of the company?
  • 4. Amity Business School Question 5. M/S WXY ltd has the following capital structure : 10% Debenture 300000 9% preference shares 200000 Equity 5000 shares of Rs.100 each 500000 The equity share of the are quoted at Rs.102 and the company is expected to declare a dividend Of Rs.9 per share which is expected to grow at the rate of 5% i . Assuming the tax rate applicable to the company is 50% calculate the weighted average cost ii. If the company raise additional term loan at 12% for Rs.500000 to finance its expansion plan calculate the revised WACC. The company’s assessment is that it will be in position to Increase the dividend from Rs.9 per share to Rs.10 per share, but the business risk associated With the new financing way bring down the market price from Rs.102 to Rs.96 per share.sss