COST OF CAPITAL
I. Cost of Equity
Dividend Capitalization Approach
Q1
Q2
A company issues 1000 equity shares of Rs100 each at a premium of 10%. The company has
been paying 20% dividends to equity shareholders for the past 5 years and expects to
maintain the same in the future also. Compute the cost of equity capital. Will it make any
difference if the market price of equity share is Rs 160?
Earnings Capitalization Approach
Q3
Q4:
P & G company’s current earnings per share is Rs 6 and its share is currently selling at Rs.25
per share. Compute cost of equity capital.
Q5. A firm’s currently earning Rs.1,00,000 and its share is selling at a market price of Rs90.
The firm has 10,000 shares outstanding and has no debt. Compute cost of equity.
Dividend Capitalization Plus Growth rate approach
Constant Growth: Dividend payout ratio is constant
Q6:
Q7:
Q8: The market Price of an equity share of X Ltd is Rs. 80. The dividend expected a year
hence is Rs 1.60 per share. The shareholders anticipate a growth of 7% in dividends.
Calculate the cost of equity capital.
Q9: The current market price of a company’s shares is Rs.100. The company plans to issue
new shares to raise one crore rupees. The net price proceeds per shares will be the market
price less the floatation cost which is 5% of the share price. If the company plans to pay a
dividend of Rs 4.75 and the growth in dividend is expected to be 8%. Calculate the cost of
new issue of equity shares.
Q10: A company's share is quoted in the market at Rs.40 and the expected dividend for the
next year is Rs.2 per share. Thereafter, the investors expect a growth rate of 5% p.a.
a) Calculate the cost of equity capital.
b) Calculate the market price per share if the expected growth rate is 6% p.a.
c). Calculate the market price per share if the dividend of Rs.2 is maintained, the cost of
equity is 9% and the expected growth in dividends is 6% p.a.
Cost of Capital under variable growth rate:
Q11: From the following dividends record of a company compute expected growth rate
Year 2014 2015 2016 2017 2018 2019 2020 2021
Dividen 21 22 23 24 25 26 27 28
d Per
share
(Rs)
II. Cost of Retained Earnings
Q12:
Q13: Cost of equity of a company is 20%. Rate of floatation cost is 5%. Rate of income tax is
30%. Calculate cost of retained earnings.
Q14: The following particulars relate to Prasad Ltd.
Rs
Equity share capital 1,00,000 shares of 10,00,00
Rs.10 0
Profit after tax 9,00,000
Current market price of equity share 75
(a) Calculate the cost of equity.
(b) What is the cost of retained earnings if the average personal tax rate of shareholders is
30% and the brokerage cost for making new investments is 2%.
III. Cost of Debt
Cost of perpetual / irredeemable debt:
Q15:
Q16:
Q17: A company has 10 % perpetual debt of Rs. 1,00,000. Tax rate is 35%. Determine the
cost of debt (before & after Tax) assuming the debt is issued
a) At Par
b) At 10% discount
c) At 10% premium
Q18. X Ltd issues 50,000 8% debentures of Rs.10 each at a premium of 10%. The cost of
floatation are 2%. The rate of tax applicable to the company is 60%. Compute cost of
irredeemable debt
Q19: Vicky Ltd issued Rs.2,00,000 9% debentures at the premium of 10%. The floatation
costs (issues expenses) were 2%. The tax rate is 40%. Compute the cost of debt before tax
and after tax.
Cost of Redeemable Debt:
Q20:
Q21:
Q22: A five year Rs.100 debenture of a firm can be sold for a net price of Rs.96.50. The
coupon rate of interest is 14% p.a. and the debenture will be redeemed at 5% premium on
maturity. The firm’s tax is 40%. Compute the after-tax cost of debenture.
Q23: Assuming that a firm pays tax 50% rate. compute the after tax cost of debt capital in the
following cases:
i) A perpectual bond sold at par, coupon rate if interest being 7%.
ii) A 10 year, 8% Rs 1000 per bond sold at Rs. 950 less 4% underwriting
commission.
IV. Cost of Preference Share
Irredeemable Preference Share
Q24:
Redeemable Preference Share
Q25: The terms of the preference share issue made by XYZ company are as follows:
Each preference share has a face value of Rs.100 and carries a dividend rate of 14 percent
payable annually. The share is redeemable after 12 years at par. If the net amount realized per
share is Rs. 95. What is the cost of the preference capital?
Q26:
V. Computation of Overall Cost of Capital Or Weighted Average
Cost of Capital
Q27:
Q28:
Q29:
Q30:
Q31:
Q32:
