This document discusses the calculation of weighted average cost of capital (WACC) using different methods and capital structures. It provides an example calculating WACC based on book values and market values using the proportions and costs of various sources of capital - equity shares, debentures, retained earnings. The WACC is computed in 1-3 sentences using both weighted proportions and total costs, with results ranging from 11.09% to 20.38% depending on the values and method used.
Cost of Capital,Meaning,Computation of Specific Costs,Cost of Debt,Cost of Preference Shares,Cost of Equity Capital,Cost of Retained Earnings ,Weighted Average Cost of Capital
Cost of Capital,Meaning,Computation of Specific Costs,Cost of Debt,Cost of Preference Shares,Cost of Equity Capital,Cost of Retained Earnings ,Weighted Average Cost of Capital
risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
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This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
Cost of Preference Capital Soved Problems-kpuma reur
The Preference Capital carries a cost. The Cost of Preference Capital is calculated as follows:
Preference Shares may be issued at Par, Premium, Discount.
Cost of Redeemable Preference Shares
,
cost of capital
,
bond
,
preferred stock
,
factors influencing cost of capital determination
,
cost of new common stock
,
cost of debt components
,
cost of preferred stock
,
components of cost of capital
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Thank You For Waching
Subscribe to DevTech Finance
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
Cost of Preference Capital Soved Problems-kpuma reur
The Preference Capital carries a cost. The Cost of Preference Capital is calculated as follows:
Preference Shares may be issued at Par, Premium, Discount.
Cost of Redeemable Preference Shares
,
cost of capital
,
bond
,
preferred stock
,
factors influencing cost of capital determination
,
cost of new common stock
,
cost of debt components
,
cost of preferred stock
,
components of cost of capital
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
BlueBookAcademy.com - Value companies using Discounted Cash Flow Valuationbluebookacademy
In this slideshow on valuing companies using discounted cash flows (DCF), we'll run through the most popular valuation tool used by investment bankers, traders and investors to compute the value of a company's shares and make stock recommendations.
As a fundamental concept in finance, DCF models have wider applications in valuing bonds (fixed income) and in project appraisal.
Measures of cost of capital
The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment.
The cost of capital represents the overall cost of financing to the firm.
Sources of Funds:
Transactions which result in an increase in the amount of fund or working capital are called sources of fund.
The following are the sources of funds:
Funds from operations, operating profit or trading profit.
Non operating incomes.
Refund of Income Tax (received).
Issue of Shares for cash or for any other current asset.
Issue of debentures for cash or for any other current asset.
Long term and medium term loans borrowed.
Long term or medium term deposits accepted.
Sale of long term investments for cash or for any other current asset.
Sale of fixed assets for cash or for any other current asset.
Preparation of Funds from Operations
The term Operation means the day to day affairs of the business.
It refers to trading.
Non operating items should not be treated as operational, while ascertaining funds from operations.
Examples of Non Operating expenses:
Depreciation
Loss on sale of fixed assets.
Writing-Off of fictious assets like Goodwill
Preliminary expenses, discount or loss on issue of shares and debentures
FFA- Statement of Schedule of Changes in Working Capitaluma reur
Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.
Investment:
Relationship between profit and investment is shown by computing “Rate of Return ratios”.
Return on Investment (ROI)
Return on Total Resources
Return on Equity (ROE)
Earning Per Share Ratio (EPS)
Fixed Assets Turnover Ratio
Debt to Total Fund Ratio
Entrepreneurship Development Programme (EDP)uma reur
EDP – Introduction to Entrepreneurship Development Programme
Entrepreneurship Development Programme is primarily meant for developing those first generation entrepreneurs who on their own cannot become successful entrepreneurs. It covers three major variables- location, target group and enterprise.
Any of these can become the focus or starting point for initiating and implementing an EDP.
The Khadi and Village Industries Commission (KVIC)uma reur
The Khadi and Village Industries Commission (KVIC) is a statutory body formed in April 1957 (During 2nd Five Year plan) by the Government of India, under the Act of Parliament, 'Khadi and Village Industries Commission Act of 1956'. It is an apex organisation under the Ministry of Micro, Small and Medium Enterprises, with regard to khadi and village industries within India, which seeks to - "plan, promote, facilitate, organise and assist in the establishment and development of khadi and village industries in the rural areas in coordination with other agencies engaged in rural development wherever necessary.“
KVIC also helps in building up reserve of raw materials for supply to producers.
The commission focuses in creation of common service facilities for processing of raw materials, such as semi-finished goods.
KVIC has also helped in creation of employment in Khadi industry.
Schemes Under Khadi and Village Industries Commission
Under the Khadi and Village Industries Commission, you can avail the following schemes:
PMEGP or Prime Minister's Employment Generation Programme
The Ministry of Micro, Small and Medium Enterprises introduced this credit linked subsidy scheme for the creation of employment in both rural and urban areas of the nation. This scheme replaced the previous Rural Employment Generation Programme or in short the REGP.
Under the PMEGP scheme the applicants from the general category are given a 15% to 25% subsidy on the interest rates. Applicants from other categories than general as well as woman applicants, former service members, physically disabled and applicants from the hill or border areas are provided with a subsidy of 20% to 35%.
Entrepreneurship Development Institute of India (EDII)uma reur
EDI has been spearheading entrepreneurship movement throughout the nation with a belief that entrepreneurs need not necessarily be born, but can be developed through well-conceived and well-directed activities.
In consonance with this belief, EDI aims at:
Creating a multiplier effect on opportunities for self-employment,
Augmenting the supply of competent entrepreneurs through training,
Augmenting the supply of entrepreneur trainer-motivators,
Participating in institution building efforts,
Long-Term Financing
Long-term financing is usually needed for acquiring new equipment, R&D, cash flow enhancement, and company expansion. Some of the major methods for long-term financing are discussed below.
Equity Financing
Equity financing includes preferred stocks and common stocks. This method is less risky in respect to cash flow commitments. However, equity financing often results in dissolution of share ownership and it also decreases earnings.
The cost associated with equity is generally higher than the cost associated with debt, which is again a deductible expense. Therefore, equity financing can also result in an enhanced hurdle rate that may cancel any reduction in the cash flow risk.
Sales:
Relationship between profit and sales is shown by computing “Profit margin ratios”.
Gross Profit Ratio
Operating Ratio
Expenses Ratio
Operating Profit Ratio
Net Profit Ratio
From the following information calculate Debtors turnover ratio (DTR) and Average collection period (ACP).
Total Sales Rs.3,80,000, Cash sales Rs. 2,40,000, Opening Debtors Rs. 12,000, Closing Debtors Rs. 16,800. Opening balance of Bills receivable Rs. 9,600 and Closing balance of Bills receivable Rs.14,400.
Creditor’s Turnover Ratio is also known as Payables Turnover Ratio, Creditor’s Velocity and Trade Payables Ratio. It is an activity ratio that finds out the relationship between net credit purchases and average trade payables of a business.
It finds out how efficiently the assets are employed by a firm and indicates the average speed with which the payments are made to the trade creditors.
It is calculated by the following formula:
Role of financial institutions in support of women entrepreneurial activities...uma reur
The RUDSETI type of Institutions aided by GoI will, therefore, have the following objectives:
The trainings offered will be demand driven
Rural BPL youth will be given priority
Area in which training will be provided to a particular rural BPL youth will be decided after assessment of the aptitude of the candidate
Hand holding will be provided for assured credit linkage with Banks
Escort services will be provided for ensuring at least a two year follow up to ensure sustainability of micro enterprise undertaken by the rural BPL youth.
Provide intensive short-term residential self-employment training programmes with free food and accommodation to rural youth for taking up self employment initiatives and skill up gradation for running their micro-enterprises successfully.
Empower rural youth and economically backward sections leading to the development of rural enterprises and entrepreneurship.
Identify, orient, motivate, train and assist rural youth including tribal communities to attain sustainability and economic well being through rural entrepreneurship.
Upgrade technical, agricultural, managerial and service delivery skills.
Promote and train self-help groups.
Identify, develop and transfer appropriate and sustainable rural technologies.
Personality development for school and college students.
Promote awareness and trigger use of non-conventional and energy efficient technologies.
Identification & selection of right candidate for the right course.
Campus and practical approach.
Use of simulation exercises, group discussions, role plays during training period.
Field visits & experience sharing with role models.
Interactions with Bankers /Govt. Officials.
Turnover Ratios or Activity Ratios or Performance Ratios
Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise.
The types of Turnover ratios are: –
Inventory Turnover Ratio or Stock Turnover Ratio.
Debtors Turnover Ratio.
Creditors Turnover Ratio.
Cash Turnover Ratio.
Working Capital Turnover Ratio.
Fixed Assets Turnover Ratio.
Capital Turnover Ratio or Sales to Net Worth Ratio.
It is also referred as the stock turnover ratio which is used to measure the number of sales generated from its inventory and how efficiently the inventories in a company is used.
This ratio reveals the number of times stock is replaced during a given accounting period.
It is calculated by the following formula:
Illustration 1:
From the following information calculate stock turnover ratio. Opening stock 30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross profit 37,500.
The Debtors Turnover Ratio also called as Receivables Turnover Ratio or Debtors velocity shows how quickly the credit sales are converted into the cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers.
It is calculated by the following formula:
De퐛퐭퐨퐫퐬 퐓퐮퐫퐧퐨퐯퐞퐫 퐑퐚퐭퐢퐨=(퐍퐞퐭 퐂퐫퐞퐝퐢퐭 퐒퐚퐥퐞퐬)/(퐀퐯퐞퐫퐚퐠퐞 퐃퐞퐛퐭퐨퐫퐬)
Interpretation:
Standard credit period is 30 days
If the credit period is more than 30 days it indicates that the concern is not efficient.
If the credit period is less than 30 days it indicates that the concern is efficient.
The Average Collection Period, also called as Debt Collection Period, shows how much time business takes to realize the credit sales. Simply, how long will it take to recover payments from the debtors against the credit sales?
It is calculated by dividing the number of months or days or weeks by the debtors turnover ratio.
Leverage Ratios or Solvency Ratios or Capital Structure Ratios
Leverage or Solvency ratios can be defined as a type of ratio that is used to evaluate whether a company is solvent and well capable of paying off its debt obligations or not. These ratios are used to measure the long term financial position as a test of solvency of an organisation.
The types of Leverage ratios are: –
Proprietary Ratio or Equity Ratio
Equity to Fixed Asset Ratio
Equity to Current Assets Ratio
Current Liabilities to Shareholders Funds Ratio
Debt Equity Ratio
Capital Gearing or Leverage Ratio
Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash.
The types of liquidity ratios are: –
Current Ratio or Working Capital Ratio
Quick Ratio or Liquidity Ratio or Acid Test Ratio
Absolute Liquid Ratio or Cash Ratio
Stock to Working Capital Ratio
Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations.
Current Ratio = Current Assets / Current Liabilities
Current Assets:
Current Assets means cash and those assets which can be converted into cash within one year in ordinary course of business.
Current Liabilities:
Current Liabilities are those which are to be paid by the firm in one year.
Quick Ratio or Liquidity Ratio or Acid Test Ratio :
The quick ratio is used to ascertain information pertaining to the capability of a company in paying off its current liabilities on an immediate basis.
The formula used for the calculation of a quick ratio is-
Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivables) / Current Liabilities
. Absolute Liquid Ratio or Cash Ratio:
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
Stock to Working Capital Ratio:
It is calculated by dividing the value of stock (or inventories such as raw materials, work in progress, finished goods, stores and packing materials) by the Working capital.
Role of financial institutions in support of women entrepreneurial activities...uma reur
The ‘District Industries Centre’ (DICs) programme was started by the central government in 1978 with the objective of providing a focal point for promoting small, tiny, cottage and village industries in a particular area and to make available to them all necessary services and facilities at one place. The finances for setting up DICs in a state are contributed equally by the particular State Government and the Central Government.
To facilitate the process of small enterprise development, DICs have been entrusted with most of the administrative and financial powers. For purpose of allotment of land, work sheds, raw materials etc., DICs functions under the ‘Directorate of Industries’. Each DIC is headed by a General Manager who is assisted by four functional managers and three project managers to look after the following activities :
The important objectives of DICs are as follow :
i. Accelerate the overall efforts for industrialisation of the district.
ii. Rural industrialisation and development of rural industries and handicrafts.
iii. Attainment of economic equality in various regions of the district.
iv. Providing the benefit of the government schemes to the new entrepreneurs.
v. Centralisation of procedures required to start a new industrial unit and minimisation- of the efforts and time required to obtain various permissions, licenses, registrations, subsidies etc.
CEDOK Established in 1992 is a Government of Karnataka Organisation promoted by the Department of Industries and Commerce with the support of State level industrial developmental agencies such as :
Karnataka State Small Industries Development Corporation (KSSIDC),
Karnataka State Financial Corporation (KSFC),
Karnataka State Industrial Investment Development Corporation (KSIIDC),
Karnataka Industrial Area Development Board (KIADB),
and national level financial institutions such as
Industrial Development Bank of India (IDBI),
Industrial Finance Corporation of India (IFCI),
Industrial Credit and Investment Corporation of India (ICICI) and
Government of India through Development Commissioner (SSI), New Delhi
with a objective to contribute to the development and dispersal of entrepreneurship by undertaking various entrepreneurship development and skill development / upgradation training programmes thus expand the social and economical base of entrepreneurial class
Role of financial institutions in support of women entrepreneurial activities...uma reur
Origin of SIDBI
In order to promote small scale industries in the country, a special Act was passed in Parliament in April 1990 for starting of Small Industries Development Bank of India. SIDBI is a wholly owned subsidiary of IDBI. It is providing assistance to all those institutions which are promoting small scale industries.
Capital of SIDBI
SIDBI has an authorised capital of Rs. 1000 crores. The RBI has also allocated INR 10,000 Crores to SIDBI for various venture capital activities and company startups in 2015. The entire operations of IDBI connected with small scale industries are now handed over to SIDBI.
Objectives of SIDBI:
To promote marketing of products of small scale sector.
To upgrade technology and also undertaking modernization of small scale units.
To provide more financial assistance to small scale ancillary and tiny sector.
To encourage employment oriented industries.
To coordinate all the other institutions involved in the promotion of small scale industries.
Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.
Modes of Expression of Ratios:
Ratios may be expressed in any one or more of the following ways:
(a) Proportion,
(b) Rate or times
(c) Percentage.
Advantages of Ratio Analysis:
The information shown in financial statements does not signify anything individually because the facts shown are inter-related. Hence it is necessary to establish relationships between various items to reveal significant details and throw light on all notable financial and operational aspects. Ratio analysis caters to the needs of various parties interested in financial statements. The basic objective of ratio analysis is to help management in interpretation of financial statements to enable it to perform the managerial functions efficiently.
Limitations of Ratio Analysis:
Ratios are precious tools in the hands of management but the utility lies in the proper utilisation of ratios. Mishandling or misuse of ratios and using them without proper context may lead the management to a wrong direction. The financial analyst should be well versed in computing ratios and proper utilization of ratios. Like all techniques of control, ratio analysis also suffers from several ‘ifs and buts’ and for proper computation and utilization of ratios the analyst should be aware of the limitations of ratio analysis.
Uses and Users of Financial Ratio Analysis
Analysis of financial ratios serves two main purposes:
1. Track company performance
Determining individual financial ratios per period and tracking the change in their values over time is done to spot trends that may be developing in a company. For example, an increasing debt-to-asset ratio may indicate that a company is overburdened with debt and may eventually be facing default risk.
2. Make comparative judgments regarding company performance
Comparing financial ratios with that of major competitors is done to identify whether a company is performing better or worse than the industry average. For example, comparing the return on assets between companies helps an analyst or investor to determine which company is making the most efficient use of its assets.
Users of financial ratios include parties external and internal to the company:
External users: Financial analysts, retail investors, creditors, competitors, tax authorities, regulatory authorities, and industry observers
Internal users: Management team, employees, and owners
How to Make a Field invisible in Odoo 17Celine George
It is possible to hide or invisible some fields in odoo. Commonly using “invisible” attribute in the field definition to invisible the fields. This slide will show how to make a field invisible in odoo 17.
2024.06.01 Introducing a competency framework for languag learning materials ...Sandy Millin
http://sandymillin.wordpress.com/iateflwebinar2024
Published classroom materials form the basis of syllabuses, drive teacher professional development, and have a potentially huge influence on learners, teachers and education systems. All teachers also create their own materials, whether a few sentences on a blackboard, a highly-structured fully-realised online course, or anything in between. Despite this, the knowledge and skills needed to create effective language learning materials are rarely part of teacher training, and are mostly learnt by trial and error.
Knowledge and skills frameworks, generally called competency frameworks, for ELT teachers, trainers and managers have existed for a few years now. However, until I created one for my MA dissertation, there wasn’t one drawing together what we need to know and do to be able to effectively produce language learning materials.
This webinar will introduce you to my framework, highlighting the key competencies I identified from my research. It will also show how anybody involved in language teaching (any language, not just English!), teacher training, managing schools or developing language learning materials can benefit from using the framework.
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This slides describes the basic concepts of ICT, basics of Email, Emerging Technology and Digital Initiatives in Education. This presentations aligns with the UGC Paper I syllabus.
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The map views are useful for providing a geographical representation of data. They allow users to visualize and analyze the data in a more intuitive manner.
3. WEIGHTED AVERAGE COST OF CAPITAL (WACC)
(OVERALL COST OF CAPITAL = KO)
Meaning:
Weighted average cost is the average of the costs of specific sources of
capital employed in a business, properly weighted by the proportion they
hold in the firm’s capital structure.
According to ICMA London:
“Weighted average cost of capital is the average cost of company’s
finance weighted according to the proportion each element bears to the
total pool of capital, weighing is usually based on market valuations
current yield and costs after tax.”
4. COMPUTATION OF WEIGHTED AVERAGE COST
The concept of weighted average cost is simple and requires the following
steps:
1. Computation of weights (proportions) to be assigned to each type of
funds.
2. Assignment of costs of various sources of capital.
3. Adding of the weighted cost of all sources of funds to get an overall
weighted average cost of capital.
5. BOOK VALUE & MARKET VALUE
Book Value :
Value shown in the balance sheet is called book value. Weightage to each source of finance
is given on the basis of book value as recorded in the balance sheet.
Market Value :
Market value represent prices of prevailing in the stock market for securities. So current
market price are applied in ascertaining the weightage.
6. 43. From the following information calculate weighted average cost of capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%
Solution:
Calculation of Weighted Average Cost of Capital
1. Using Book Value
Based on weights
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures *
100
1,00,000
10,00,000
𝟏,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.09
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.91
0.12
0.11
0.09 * 0.12 = 0.0108
0.91 * 0.11 = 0.1001
11,00,000 1.00 0.1109
0.1109 * 100 = 11.09%
7. Solution:
Calculation of Weighted Average Cost of Capital
1. Using Book Value
Based on weights
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures *
100
1,00,000
10,00,000
𝟏,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.09
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.91
0.12
0.11
0.09 * 0.12 = 0.0108
0.91 * 0.11 = 0.1001
11,00,000 1.00 0.1109
0.1109 * 100 = 11.09%
8. Calculation of Weighted Average Cost of Capital
2. Using Market Value
Based on weights
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
𝟏,𝟓𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.11
𝟏𝟐,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.89
0.12
0.11
0.11 * 0.12 = 0.0132
0.89 * 0.11 = 0.0979
13,50,000 1.00 0.1111
0.1111 * 100 = 11.11%
43. From the following information calculate weighted average cost of
capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%
9. Calculation of Weighted Average Cost of Capital
1. Using Book Value
Based on Total Cost
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures * 100
1,00,000
10,00,000
12%
11%
12,000
1,10,000
11,00,000 1,22,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,22,000
11,00,000
∗ 100 = 11.18% = 11%
43. From the following information calculate weighted average cost of
capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%
10. 2. Using Market Value
Based on Total Cost
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
12%
11%
18,000
1,32,000
13,50,000 1,50,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,50,000
13,50,000
∗ 100 = 11.11% = 11%
43. From the following information calculate weighted average cost of
capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%
11. Solution:
Calculation of Weighted Average Cost of Capital -- Based on weights
1. Using Book Value -- 11.09%
2. Using Market Value -- 11.11%
Calculation of Weighted Average Cost of Capital -- Based on Total Cost
1. Using Book Value -- 11.18%
2. Using Market Value -- 11.11%
12. Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures * 100
1,00,000
10,00,000
𝟏,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.09
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.91
0.12
0.11
0.09 * 0.12 = 0.0108
0.91 * 0.11 = 0.1001
11,00,000 1.00 0.1109
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
𝟏,𝟓𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.11
𝟏𝟐,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.89
0.12
0.11
0.11 * 0.12 = 0.0132
0.89 * 0.11 = 0.0979
13,50,000 1.00 0.1111
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures * 100
1,00,000
10,00,000
12%
11%
12,000
1,10,000
11,00,000 1,22,000
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
12%
11%
18,000
1,32,000
13,50,000 1,50,000
Solution:
Calculation of Weighted Average Cost of Capital -- Based on
weights
1. Using Book Value -- 11.09%
2. Using Market Value -- 11.11%
Calculation of Weighted Average Cost of Capital -- Based on Total Cost
1. Using Book Value -- 11.18%
2. Using Market Value -- 11.11%
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,50,000
13,50,000
∗ 100 = 11.11% = 11
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,22,000
11,00,000
∗ 100 = 11.18% =
11%
13. 44. A Ltd has the following capital structure:
Equity expected dividend 12% Rs.20,00,000
10% Preference Shares Rs.10,00,000
8% Debt Rs.30,00,000
You are required to calculate weighted average cost of capital assuming 50% as the rate of
tax, before and after tax.
14. Solution:
1. Calculation of Weighted Average Cost of Capital based on Total Cost. Before Tax:
Sources of capital Amount Cost of capital Total Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
12%
10%
8%
2,40,000
1,00,000
2,40,000
60,00,000 5,80,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
5,80,000
60,00,000
∗ 100 = 𝟗. 𝟔𝟕%
2. Calculation of Weighted Average Cost of Capital based on Weights. Before Tax:
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
33.33
16.67
50.00
12% (0.12)
10% (0.10)
8% (0.08)
(33.33 * 0.12) = 4.00
(16.67 * 0.10) = 1.67
(50 * 0.08) = 4.00
60,00,000 100
9.67
𝟐𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 33.33
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 16.67
𝟑𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 50.00
15. 3. Calculation of Weighted Average Cost of Capital based on Total Cost. After Tax:
Sources of capital Amount Cost of capital Total Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
12%
10%
(Tax 50% , 50% 0f 8% = 4%)
4%
2,40,000
1,00,000
1,20,000
60,00,000 4,60,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
4,60,000
60,00,000
∗ 100 = 𝟕. 𝟔𝟕%
4. Calculation of Weighted Average Cost of Capital based on Weights. After Tax:
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
33.33
16.67
50.00
12% (0.12)
10% (0.10)
4% (0.04)
(Tax 50% , 50% 0f 8% =
4%)
(33.33 * 0.12) = 4.00
(16.67 * 0.10) = 1.67
(50 * 0.04) = 2.00
60,00,000 100
7.67
𝟐𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 33.33
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 16.67
𝟑𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 50.00
16. 48. Following are the details regarding the capital structure of a company.
You are required to calculate weighted average cost of capital using:
a) Book Value of weights.
b) Market Value of Weights.
Sources of Book Value Market Value Specific Cost
Debentures 80,000 76,000 10%
Preference Shares 20,000 22,000 15%
Equity Shares 1,20,000 1,80,000 30%
Retained Earnings 40,000 60,000 15%
17. Solution: Based on Total Cost
Calculation of Weighted Average Cost of Capital based on Total Cost using Book Value.
Sources of capital Book Value - Amount Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
80,000
20,000
1,20,000
40,000
10%
15%
30%
15%
8,000
3,000
36,000
6,000
2,60,000 53,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
53,000
2,60,000
∗ 100 = 𝟐𝟎. 𝟑𝟖%
Sources of capital Market Value - Amount Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
76,000
22,000
1,80,000
60,000
10%
15%
30%
15%
7,600
3,300
54,000
9,000
3,38,000 73,900
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
73,900
3,38,000
∗ 100 = 𝟐𝟏. 𝟖𝟔%
Calculation of Weighted Average Cost of Capital based on Total Cost using Market Value.
18. Based on Weights
Calculation of Weighted Average Cost of Capital based on Weights using Book Value.
Sources of capital Book Value
Amount
Proportion Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
80,000
20,000
1,20,000
40,000
30.76
7.69
46.16
15.39
10%(0.10)
15%(0.15)
30%(0.30)
15%(0.15)
30.76 * 0.10 = 3.076
7.69 * 0.15 = 1.1535
46.16 * 0.30 = 13.848
15.39 * 0.15 = 2.3085
2,60,000 100 20.386
𝟖𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 30.76
𝟐𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 7.69
𝟏,𝟐𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 46.16
𝟒𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 15.39
19. Based on Weights
Calculation of Weighted Average Cost of Capital based on Weights using Market Value.
Sources of capital Book Value
Amount
Proportion Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
76,000
22,000
1,80,000
60,000
22.49
6.51
53.25
17.75
10%(0.10)
15%(0.15)
30%(0.30)
15%(0.15)
22.49 * 0.10 = 2.249
6.51 * 0.15 = 0.978
53.25 * 0.30 = 15.975
17.75 * 0.15 = 2.663
3,38,000 100 21.865
𝟕𝟔,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 22.49
𝟐𝟐,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 6.51
𝟏,𝟖𝟎,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 53.25
𝟔𝟎,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 17.75