Numericals on cost of capital and capital structure 1. A company has 15 % perpetual debt of Rs. 1,00,000.

The tax rate is 35%. Determine the cost of capital (before tax as well as after tax) assuming the debt is issued at (i) par, (ii) 10% discount, and (iii) 10% premium 2. A company issues a new 15 % debentures of Rs. 1000 face value to be redeemed after 10years. The debenture is expected to be sold at 5 % discount. It will also involve flotation costs of 2.5 % of face value. The companys tax rate is 35% What would the cost of debt be? Illustrate the computations using (i) trial and error approach and (ii) shortcut method 3. A company issues 15 % debentures of Rs. 100 for an amount aggregating Rs. 1,00,000 at 10% premium, redeemable at par after five years. The companys tax rate is 35% . Determine the cost of debt, using the shortcut method. 4. A company issues 14% irredeemable preference shares of the face value of Rs. 100 each. Flotation costs are estimated at 5% of the expected sale price. (a) What is the kp, if preference shares are issued at (i) par value, (ii) 10% premium, and (iii) 5% discount? (b) Also, compute kp in these situations assuming 10% dividend tax. 5. ABC Ltd. Has issued 14% preference shares of the face value of Rs. 100 each to be redeemed after 10 years. Flotation cost is expected to be 5%. Determine the cost of preference shares(kp). 6. Suppose that dividend per share of a firm is expected to be Re. 1 per share next year and is expected to grow at 6 % per year perpetually. Determine the cost of equity capital, assuming the market price per share is R.25. 7. The hypothetical Ltd. wishes to calculate its cost of equity capital using the capital asset pricing model approach. From the information provided to the firm by its investment advisors along with the firms own analysis, it is found that the risk-free rate of return equals 10%; the firms beta equals 1.5 and the return on the market portfolio equals 12.5 %. Compute the cost of equity capital. 8. (a) A firms after-tax cost of capital of the specific sources is as follows: Cost of debt 8% Cost of preference shares 14% Cost of equity funds 17% (b) The following is the capital structure: Source Amount Debt Rs. 3.00,000 Preference capital 2,00,000 Equity capital 5,00,000 10,00,000 ( c) Calculate the weighted average cost of capital, ko, using book value weights. 9. From the information contained in the earlier problem, calculate the weighted average cost of capital , assuming that the market values of different sources of funds are as follows: Source Market value Debt Rs. 2,70,000 Preference shares 2,30,000 Equity and retained earnings 7,50,000 Total 12,50,000

10. Calculate the explicit cost of debt for each of the following situations: (a) Debentures are sold at par and flotation costs are 5 %. (b) Debentures are sold at premium of 10% and flotation costs are 5% of issue price. (c) Debentures are sold at discount of 5% and flotation costs are 5% of issue price. Assume: (i) coupon rate of interest on debentures is 15%; (ii) face value of debentures is Rs. 100; (iii) maturity period is 10 years; and (iv) tax rate is 35%.