COST OF CAPITAL 1.The expected average earnings per share of a company are Rs.

9 and the current market price of the share is Rs.90. Find the cost of equity capital. (10%) 1. The market price of a share is Rs. 125 and a company plans to pay a dividend of Rs. 5 per share. The growth in dividends is expected to be at the rate of 8 percent. Find out the cost of equity capital. (Ans: 12%) 1.1 The market price of a share is Rs.150 and a company plans to pay dividend of Rs.12 per share. The growth rate of dividend is estimated at the rate of 15%. Find the cost of equity(23%) 2.A company currently is maintaining 6 per cent rate of growth in dividends. The last year dividend was Rs.4.5 per share. Equity share holders required rate of return is 15 per cent. What is the market price per share. (Ans;50) 2. A company issues 6.5 per cent preference shares at Rs. 130 each without a maturity date. Find out the cost of preference capital. (Ans:5%) 3. Ten year 10 per cent debentures of a firm are sold at a rate of Rs. 80. The face value of a debenture is Rs. 100. 40 percent tax rate is assumed. Find out the cost of debt capital.(Ans: 8%) 3. 8 years 15% debentures of a firm are sold at the rate of Rs.80. The face value of the debentures is 150, 50% tax is assumed. Find the cost of debt

4.The current market price of a share is Rs. 85. A company anticipated earnings of RS. 1 lakh to be distributed among 10,000 shareholders. The shareholders tax rate is 30 per cent. Find out the cost of internally retained earnings: (Ans: 10%) 5.Tata Auto, a manufacturer of auto components is planning to raise a capital of Rs.100 crore. The current price of the share in the market is Rs.230 and the firm has paid a dividend of Rs.20 per share. The track record of the growth in dividend and earnings has been encouraging as Tata Auto has doubled dividend in the last five years. The dividend pay out per share for the last five years has been as follows:Year 2009 2008 2007 2006 2005 Dividend 20 17.5 15 12.50 10 (Rs/Share) a. What is the cost of equity for Tata Auto? (18.92%)

5. A company has the following capital structure: Securities Book After Tax Cost value (in per cent) (Rs) Equity Capital 8,50,000 15 Retained 2,25,000 10

Earnings Preference Capital Debentures

1,50,000 10,00,00 0

18 6

22,25,00 0 From the above information, you are required to find out the weighted average cost of capital of a company. (Ans: 10.65%) 6. The Ram Ltd. has the following capital structure: Common Shares ( 20,000 shares) Rs. 40,00,000 10% Preference Shares Rs. 10,00,000 14% Debentures Rs. 30,00,000 -----------------------------------Rs. 80,00,000 --------------------------------The share of the company sells for Rs. 20. It is expected that the company will pay next year a dividend of Rs. 2 per share which will grow at 7% for ever. Assume a 50 % tax rate. (a) Compute the weighted average cost of capital based on the existing capital structure. (b) Compute the new weighted average cost of capital if the company raise an additional Rs. 20,00,000 debt by issuing 15% debentures. This would increase the expected dividend to Rs. 3 and leave the growth rate unchanged, but the price of share will fall to Rs. 15 per share.

(Ans: 12.4% (b) 15.5%)

7.The capital structure of a Limited company is as follows: Equity Share capital (1,00,000 Shares) Rs. 20,00,000 5 % Preference Shares RS. 5,00,000 6 % Debentures Rs. 15,00,000 ---------------------------------Rs. 40,00,000 - --------------------------------The market price of the companys equity share is Rs. 20. It is expected that the company will pay a current dividend of RS. 3 per share which will grow at 8 per cent for ever. The tax rate may be presumed at 50 per cent. Calculate the following: (a) A weighted average cost of capital based on existing capital structure.

(b) The new weighted average cost of capital in case the company raises an additional Rs. 10,00,000 debt by issuing 8 per cent debentures. This would result in increasing the expected dividend to Rs. 4 and leave the growth rate unchanged but the price will fall to Rs. 15 per share. (c) The cost of capital if in (b) above, growth rate increases to 10 per cent. (Ans: (a) 13.26% (b) 16.20% (c) 17% 8. The following information is available from the Balance Sheet of Z Ltd. Equity Share Capital (30,000 Shares Of Rs. 10 each Rs. 3,00,000 Reserves and Surplus Rs. 2,00,000 10 % Debentures Rs. 2,00,000 The rate of tax of the company is 50 %. Current level of equity dividend is 15 %. Compute the weighted Average Cost of Capital using the above figure. (Ans: 7.86%)

CAPITAL STRUCTURE: 1. A company s expected annual net operating income is Rs. 1,00,000 and it has Rs. 3,00,000, 10 % debentures. The equity capitalisation rate is 12% (a) Calculate the value of the firm and over all capitalisation rate under net income approach (b) Find out the impact on the value of the firm and over all capitalisation rate by increasing the debt component to Rs. 4,00,000 and decrease in debt upto Rs. 2,00,000 (Cost remains the same) (Ans: EATESH: Rs. 70,000 Overall capitalisation rate: 11.32%,11.11%,11.54%) 2. A company has net operating Income of 2,00,000: average cost of capital is 10 % and the debt component of Rs. 6,00,000, 8% in capital mix. Findout the value of the firm by operating Income Approach Rs. has the net

3. VS International Ltd, has a capital structure (all equity) of RS. 5,00,000 each share of Rs.10. The firm wants to raise an additional RS. 2,50,000 for expansion project. The firm has the following four alternative financial plans I,II,III and IV. If the firm is able to earn an operating profit at RS. 80,000 after additional investment and 50% tax rate.

Calculate EPS for all four alternatives and select the preferable financial plan. Financial plan: (i) Raising the entire amount in the form of equity capital (ii) (ii) Raise 50% as equity capital and 50%, as 10% debt capital 4. KPMG Ltd., has currently an ordinary share capital of Rs. 25,00,000, consisting of 25,000 shares of Rs.100 each. The management is planning to raise another Rs. 20,00,000 to finance a major programme of expansion through one of the four possible financial plans. (i) Entirely through ordinary shares (ii) Rs. 10 lakh through ordinary shares and Rs. 10 lakh through long term borrowings at 8 % interest p.a (iii) RS.5 lakh through ordinary shares and Rs. 15 lakh through long term borrowing at 9 % interest p.a (iv) RS. 10 lakh through ordinary shares and RS.10 lakh through preference shares with 5% dividend. The companys expected EBIT will be Rs. 8 lakh. Assuming a corporate tax rate of 46%. Calculate the EPS in each alternative and

comment which alternative is best and why? (Ans: 9.6, 11.108, 11.97,10.91) 5. Penta Four Ltd., has currently adopted an all equity structure consisting of 15,000 equity shares of RS. 100 each. The management is planning to raise another RS. 25 lakh to finance a major expansion programme and is considering three alternative methods of financing. (i) To issue 25,000 equity shares of Rs. 100 each (ii) To issue 25,000, 8% debentures of Rs. 100 each (iii) To issue 25,000, 8% preference shares of RS. 100 each The companys expected EBIT will be Rs. 8 lakh. Assuming a corporate tax rate of 46%. Calculate the EPS.(Ans: 10.8,21.6,15.47) 6. WDC Ltd., has a total capitalisation of RS. 10 lakh consisting entirely of equity capital(Rs.10 each ). It is planning to raise an additional fund to Rs. 5 lakh for implementing capital budgeting project. There are two alternatives available to the company. (a) Entire equity share capital by issue of shares (b) Entire amount by debt at 10 % interest, tax rate is 50%. Calculate indifference point.(Ans: Rs. 1,50,000)

7. If a firm requires RS. 5,00,000 for its immediate investment plans,it has two plans viz.....(a) Either to raise the entire amount through the shares (b) Half of the amount is raised through the equity and remaining half is raised through the debt at 10% interest and tax rate is 50%.Calculate the point of indifference.(Ans: EBIT:Rs. 50,000) 8. From the following particulars of ABC Ltd, Calculate Operating Leverage: Particulars Sales Revenue Variable Cost Fixed Cost (Ans: 2.66) 2003 10,00,000 6,00,000 2,50,000 2004 12,50,000 7,50,000 2,50,000

9. A firm has sales of 1,00,000 units at Rs 10 p/u. Variable cost of the produced products is 60% of the total sales revenue. Fixed cost is RS. 2,00,000. The firm has used a debt of Rs. 5,00,000 at 20% interest. Calculate the operating leverage & financial leverage. 10. From the following information, calculate operating leverage,financial leverage and combined leverage. Sales 50,000 units at Rs. 4 per unit Variable cost Rs. 2 per unit Fixed cost Rs. 75,000

10%, debentures of Rs. 2,00,000 (Ans: oc :4,fl:5, cl: 20) 10.Consider the following information for Kaunark Enterprise: Rs. In lakh EBIT 1,120 PBT 320 Fixed Cost 700 Calculate percentage change in earnings per share if sales increased by 5 percent.(Ans: DOL: 1.625,FL:3.5 and CL: 28.4375)