Unit 3 Questions – cost of capital
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4. A company has raised money from 2 sources
1) loan of 600,000 $ from a bank @ 10%
2) debenture worth 1 m $ which has a face value of 100$ and they were issued at a discount of 10%.
flotation cost is 1$ and interest rate is 12%.
Tax rate is 30%
calculate cost of term loan and cost of debt
5. ABC company has issued 5000 debentures amounting to 800,000 $ and they were issued at a premium
of 5%.
Flotation cost is 3$. Interest rate is 12%.
Corporate tax is 30%. Calculate cost of debt
6. XYZ plc has issued 12 % redeemable debt with 5 years to redemption. The redemption is given at
nominal value. The current market value of the debt is 107.59 $. The corporate tax is 30%. Calculate
the cost of debt to the company.
7. XYZ plc has issued 6% debentures quoted at 85$. They are redeemable after 5 years and at a premium
of 10%. Calculate
a) cost of debt to the company assuming the rate to be taken @ 5% and 10%.
b) calculate return to investors.
8. XYZ plc has issued 10% debentures quoted at 102$. They are redeemable after 5 years. Redemption is
at a discount of 5%. Corporate tax is 30%, calculate the cost of debt to the company. Assume the rate
is 5% and 10%.
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10. XYZ plc has issued dividend in the year 2019 and it is 4 $ per share. During this year the MPS of the
company was 90$. In the year 2020 they are expecting a growth rate of 9%. Calculate cost of equity.
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16. In 2019 ABC plc has earnings per share of 20$ and it decided to retain 45% of its earning per share.
During the year the MPS (inclusive of dividend) was 110$. In 2020 the shareholders are expecting a
growth rate of 8%. Calculate cost of equity.
17. the average market return being paid by the company on risky investments are 12% compared to 5% on
treasury bills. the company has a beta of 1.2. Calculate the required return of an equity investor for the
company?
18. you are the given the following facts about a firm: -
i) risk free rate of return is 11%
ii) beta coefficient of the firm is 1.25
compute the cost of equity capital using CAPM assuming a market return of 15%.
What would be the cost of equity if the systematic risk rises to 1.75
19. You are given the risk-free return and expected market return in respect of a number of projects as
follows
expected market
project risk free return return beta
1 5 7.5 1
2 7 10 1.5
3 5.5 9 0.9
4 4.5 8 1.4
What is the required return on equity in each project using CAPM. What generalisations can you infer from
the above situations.
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21. ABC company wants to raise 2m $ for a project and it was financed as follows
1) they issued 8000 debt amounting to 800,000$ and were issued at a premium of 5%. Flotation cost is
5$. Int rate is 10%. Tax rate is 30%.
2) the company also issued 5000 equity shares amounting to 800,000$. The avg market return paid on
the risky investments is 15%. compared with 8% on treasury bills. The systematic risk of the company
is 1.5.
3) the company has taken a loan of 400,000 $ from a bank @ 10%.
Calculate WACC.
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