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COst of Capital - Bringham
COst of Capital - Bringham
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 =
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 =
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)
Solution of 9.5
Kd ( 1 - T)
12% (1 - 35%)
0.12 x (0.65)
Cost of debt = 7.8%
KP =
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 =
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:
Ke =
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 =
WACC = Wd Kd ( 1 - T) + WP KP + WS KS
Ks =
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 =
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
(110,000)
290,000
(116,000)
174,000
50,000
60,000
13,000
(123,000)
277,000
(110,800)
166,200
+ Growth (g)