Numericals based on COST OF CAPITAL 1. A company requires capital funds of Rs.

5 crores and has two options: (i) To raise the amount by issuing 15% debentures, (ii)To issue equity shares at the rate of Rs. 20 per share. It already has 40 lakhs equity shares issued and debt financing of Rs. 6 crores @ 12%. (a) Find out the expected EPS under both financing options at the given EBIT levels of Rs. 2 crores and Rs. 7.5 crores. (b) What option should the company chose if tax rate is 50%? 2. (a) A company issues 15% debentures with a face value of Rs. 100. The net amount realized per debenture is Rs. 97. The debentures are redeemable at par after 10 years. The tax rate for the firm is 50%. What is the cost of these debentures? (b) A company issues Rs. 100 face value preference stock that carries 12% dividend and is redeemable after 12 years at par. The net amount realized per preference share is Rs.95. What is the cost of this preference capital? 3. (a) Discuss what approach may be used for determining the cost of retained earnings. (b) The market price per share of a company is Rs. 17.00. The dividend expected a year hence is Re. 1.00. The expected rate of dividend growth is 8%. What is the cost of equity capital to the company? 4. Assuming that a firm pays tax @ 50%, compute the after-tax cost of capital in the following cases: (a) An 9% preference share with a face value of Rs.1,000, sold at par, and maturing after 12 years. (b) A 12-year, 9%, Rs.1,000 face value bond sole at a discount of Rs.100. (c) An ordinary share selling at a current market price of Rs.250, paying a current dividend of Rs.15 per share, with dividend expected to grow at 5%. 5. (a)Why is preference capital more expensive than debenture capital? (b) A company borrows from the market by issuing debentures with a coupon of 11.50%. If tax paid is 36%, what is the cots of this issue if it sells (i) at par; (ii) at 2% premium to face value; (iii) at 4% discount to face value. (c) If the firm issues preference shares instead of debentures, and the dividend promised is 11.50%, how will the cost of preference shares work out for the firm under situations mentioned in part (b) of this question?

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