PGD025: Corporate Finance

Batch: 2021-22
Worksheet on Cost of Capital

1. Calculate Cost of Capital when 1000 10% Debentures of Rs 100 each are issued at par
(tax rate - 30%)

2. Calculate Cost of Capital when 1000 10% Debentures of Rs 100 each are issued at 5%
premium (tax rate - 30%)

3. A company issues at a discount of 5% redeemable debentures of 10% amounting Rs

10,00,000. Floatation cost is Rs 30,000 and debentures are redeemed after 5 years. Tax
rate is 50%. Calculate Kd.

4. A 5-year Rs 100 debenture of a firm can be sold at Rs 96.50, coupon rate of interest is
14% p.a. And debenture will be redeemed at 5% premium on maturity. Calculate the cost
of debt.

5. A company issues 1000 equity shares of Rs 100 each at a premium of 10%. Company has
been paying a 20% dividend to equity shares for the past 5 years and expected to
maintain the same in future also. Compute Ke.
(b) Compute Ke if Market price is Rs 160. Interpret it.

6. The shares of the company are selling at Rs 40 per share and it had paid a dividend of Rs
4 per share last year. The investors expect a growth rate of 5% p.a. Compute Ke.
(b) Considering the above calculated Ke, determine the Market Price if growth
rate is 7%. Interpret it.

7. A firm is considering an expenditure of Rs 60,00,000 for expanding its operations.

Number of equity shares - 10,00,000
Market price of the share - Rs 60
Net earnings = Rs 90,00,000
Calculate the
a) cost of existing equity
b) cost of new equity assuming that the new shares will be issued at a price of Rs 52 and
cost of new issue is Rs 2 per share.