The Cost of Capital, Capital Structure

Theories and Dividend Policy

 Cost of Capital
Rate of Return
Debt 0.15
Preference Shares 0.10
Equity 0.08
Debt
Equity 35%
40%

WACC= (0.35)(0.15)+(0.25)(0.10)+(0.40)(0.08)

Preference = 0.1095 or 10.95%

shares
25%
 Cost of Debt Cost of Preference Share Cost of Equity

Cost of debt capital

Kp = Cost of preference share
nnual interest payable
Dp = Fixed preference dividend
Net proceeds
Np = Net proceeds of an equity share
ax rate

Ke = Cost of equity capital

D = Dividend per equity share
E= earnings per share
g = Growth in expected dividend
Np = Net proceeds of an equity share
Cost of Debt
Cost of Preference Shares
Cost of Equity: Dividend Price Approach
Cost of Equity: Dividend Price Plus Growth Approach
Cost of Equity: Earning Price Approach
 Leverage

Operating Financial
Leverage Leverage
 Degree of Operating Leverage
om the following selected operating data, determine the degree of operating
verage.
Company A (Php
Php) Company B (Php)
Sales 2,500,000 3,000,000
Fixed Cost 750,000 1,500,000

ariable expenses as a percentage of sales are 50% for company A and 25%
r company B.. Compute for the operating leverage
olution
Company A Company B
ales 2,500,000 3,000,000
ariable Cost 1,250,000 750,000
ontribution Margin 1,250,000 2,250,000
ixed Cost 750,000 1,500,000
Operating Profit 500,000 750,000
 Degree of Financial Leverage
ompute for the degree of financial leverage given the following data
Company A Company B
Earnings Before Interest and Taxes 500,000 750,000
Interest 10,000 10,000
Earnings after interest but before tax 490,000 740,000
Tax 147,000 222,000
Income after interest and taxes 343,000 718,000
 Capital Structure Theories

Traditional Modern
Approach Approach

Net Operating
Net Income Income Modigliani and
Approach Approach Miller Approach
 Types of Dividend Policy

Regular Dividend Stable Dividend Irregular Dividend No Dividend

Policy Policy Policy Policy