Solution of 9.

WACC = Wd Kd ( 1 - T) + WP KP + WS KS
9.96% = 40% (9% (1-40%)) + 0 + 60% (X)
0.0996 = 0.4 (0.09 x 0.60) + 0 + 0.6 X
0.0996 = 0.0216 + 0.6 X
0.0996 - 0.0216 = 0.6X
0.078 = 0.6 X
X = 0.078 / 0.6
X = KS = 0.13 x 100
X = KS = 13%

Solution of 9.2

KP =

Preferred dividend per share (DP)

Current Price of Preffered Stock (PP)

KP =

KP =

3.8 x 100
47.5
8%

x 100

Solution of 9.3
Internal issue:
Ke = Expected dividend per share (D1)
+ Growth (g)
Current market price per share (P0)
Ke =

Rs. 3 + 5%
Rs.30

Ke =

0.10 + 0.05

Ke =

0.15 x 100

Ke =

15%

External Issue:
Ks =

Expected dividend per share (D1)

Current market price per share (P0) (1- F)

Ks =

Rs. 3
+ 5%
Rs.30 (1- 10%)

Ks =

Rs. 3
+ 0.05
Rs.30 ( 1 - .10)

Ks =

Rs. 3
Rs.30 (0.9)

+ 0.05

Ks =

Rs. 3

+ 0.05

+ Growth (g)

Rs.27
Ks =

0.11 + 0.05

Ks =

0.16 x 100

Ks =

16%

+ Growth (g)

Project A to Project E will yeild more than WACC which is 10.5%

Therefore these 5 projects are accepted.

Solution of 9.5
Kd ( 1 - T)
12% (1 - 35%)
0.12 x (0.65)
Cost of debt = 7.8%

Tuesday at 12:30 - 3:30

KP =

Preferred dividend per share (DP)

Current Price of Preffered Stock (PP) (1-F)

KP =

KP =

11 x 100
92.15
12%

Working
Current price
Less; Floatation
(97 x 5%)
NET PRICE

97
-4.85
92.15

x 100

Req no 1:
External Issue:
Ks =

Ks =

Ks =

Ks =
Ks =

Expected dividend per share (D1)

+ Growth (g)
Current market price per share (P0) (1- F)
OR
Expected dividend per share (D1)
+ Growth (g)
Net Market Price
Rs. 3.18 + 6%
Rs. 32.40
0.158148 x 100
15.82%

Req no.2:
Net market price = P (1 - F)
32.40 = 36 (1 - F)
32.40 = 36 - 36F
32.40 - 36 = - 36F
- 3.6 = - 36 F
F = 3.6 / 36
F = 0.10 x 100
F = 10%
Req no 3:

Cost of new common stock:

Ke =

Expected dividend per share (D1)

Current market price per share (P0)

Ke =

Rs. 3.18 + 6%
Rs. 36

Ke =
Ke =

0.148333 x 100
14.83%

+ Growth (g)

Solution of P 9.8
WACC = Wd Kd ( 1 - T) + WP KP + WS KS
WACC =
40% (13% (1-0.40) ) + 0 + 60% (16%)
0.40 (0.13 (0.60)) + 0 + 0.60 (.16)

WACC =

0.1272 x 100
12.72%

Calculation of Weight:
Wd = Portion of Liab. x 100
Total Equity
Wd =

1152 x 100
2880

Wd =

40 %

Ws =

Ws =

Portion of Capital x 100

Total Equity
1728 x 100
2880
60 %

WACC = Wd Kd ( 1 - T) + WP KP + WS KS

Diviidend are of two types:

a) Currently paid dividend (Do)
b) Expected dividend to be paid at the last of the year (D1)
D1 = Do x (100 + g%)
D1 = Rs. 2 x 107%
D1 = Rs. 2.14

Ks =

Expected dividend per share (D1)

Current market price

Ks =

2.14

Ks =
Ks =

+ 7%
24.75

0.156465 x 100
15.65%

WACC = Wd Kd ( 1 - T) + WP KP + WS KS

+ Growth (g)

D1 = Do x (100 + g%)
D1 = Rs. 2 x 104%
D1 = Rs. 2.08
Required no.1:

Ks =
Ks =
Ks =
Ks =

Expected dividend per share (D1)

Current market price per share (P0)
2.08 + 4%
20
0.1440 x 100
14.40%

Required no.2:

WACC = Wd Kd ( 1 - T) + WP KP + WS KS
WACC = 45% x 10% ( 1-40%) + 0 + 55% (14.40%)
WACC = 0.45 x 0.10 (0.60) + 0.55 (0.1440)
WACC =

0.1062 x 100

WACC = 10.62%
Required no.3:
Project A will be accepted because it yeild more than cost. I.e Rate of return is 13% whereas
the WACC of company is 10.62%
Project B will not be accepted because its rate of return is 10% where as the WACC is 10.62%

Sale
Less: COGS
GP

1,000,000
(600,000)
400,000

1,000,000
(600,000)
400,000

Less: Operating exp

50,000
60,000
NI before tax
Less: I/Tax
NI

(110,000)
290,000
(116,000)
174,000

50,000
60,000
13,000

(123,000)
277,000
(110,800)
166,200

+ Growth (g)

te of return is 13% whereas

here as the WACC is 10.62%