COST OF CAPITAL TUTORIAL QUESTIONS
1. P Co has just paid a dividend of 10c. Shareholders expect dividends to grow at 7% pa. P Co’s
current share price is $2.05. Calculate the cost of equity of P Co.
2. A company has recently paid a dividend of $0.23 per share. The current share price is $3.45.
If dividends are expected to grow at an annual rate of 3%, calculate the cost of equity.
3. The current share price is 140c and a dividend of 8c is due to be paid shortly. Calculate the
value of P0, the ex-div share price.
4. D Co is about to pay a dividend of 15c. Shareholders expect dividends to grow at 6% pa. Co’s
current share price is $1.25.Calculate the cost of equity of D Co
5. A company has 50,000 8% preference shares in issue, nominal value $1. The current ex div
MV is $1.20/share. What is the cost of the preference shares?
6. A company has in issue 12% redeemable debt with 5 years to redemption. Redemption is at
nominal value. The current market value of the debt is $107.59. The corporation tax rate is
30%.What is the return required by the debt providers (pre-tax cost ofdebt)?
7. A company has in issue 12% redeemable debt with 5 years to redemption. Redemption is at
nominal value. The current market value of the debt is $107.59. The corporation tax rate is
30%.What is the cost of debt to the company (post-tax cost of debt)?
8. A company has in issue 10% loan notes with a current MV of $98. The loan notes are due to
be redeemed at nominal value in five years’ time.If corporation tax is 30%, what is the
company’s post-tax cost of debt?
9. A firm has a fixed rate bank loan of $1 million. It is charged 11% pa.The corporation tax rate
is 30%.What is the post-tax cost of the loan?
10. The current average market return being paid on risky investments is 12%, compared with
5% on Treasury bills. G Co has a beta of 1.2. What is the required return of an equity investor
in G Co?
11. B Co is currently paying a return of 9% on equity investment. If the return on gilts is currently
5.5% and the average return on the market is 10.5%, what is the beta of B Co and what does
this tell us about the volatility of B’s returns compared to those of the market on average?
12.
13. Butch Co has $1 million loan notes in issue, quoted at $50 per $100 of nominal value (book
value also $50 per $100); 625,000 preference shares quoted at 40c (book value 30c per
share) and 5 million ordinary shares quoted at 25c (book value 20c per share). The cost of
capital of these securities is 9%, 12% and 18% respectively. This capital structure is to be
maintained.
(a) Calculate the weighted average cost of capital using market values
(b) Calculate the weighted average cost of capital using book values and comment on the
difference to your answer from part (a)
14. B Co has 10 million 25c ordinary shares in issue with a current price of 155c cum div. An
annual dividend of 9c has just been proposed. The company earns an accounting rate of
return to equity (ROE) of 10% and pays out 40% of the return as dividends.The company also
has 13% redeemable loan notes with a nominal value of $7 million, trading at $105. They are
due to be redeemed at nominal value in five years’ time.If the rate of corporation tax is 33%,
what is the company’s WACC?
15. The following factors have impacted the volatility of the earnings of Chocbic Co, a
manufacturer of chocolate biscuits and cereals:
increase in interest rates
increase in the price of cocoa beans
legislation changing the rules on tax relief for investments in noncurrent assets
growth in the economy of the country where Chocbic Co is based
government advice on the importance of eating breakfast
industrial unrest in Chocbic Co’s main factory.
Are they sources of systematic or unsystematic risk?
16. A company has irredeemable loan notes currently trading at $50 ex interest. The coupon
rate is 8% and the rate of corporation tax is 30%.
(a) What is the return required by the debt providers (the pre-tax cost of debt)?
(b) What is the post-tax cost of debt to the company?
17. A company has in issue 10% irredeemable debt quoted at $80 ex interest. The corporation
tax rate is 30%
(a) What is the return required by the debt providers (the pre-taxcost of debt)?
(b) What is the post-tax cost of debt to the company?
