Cost of Capital:

1. A company wishes to calculate its cost of equity using the CAPM. From the
information provided and available , it is found that risk free rate of return is
equal to 10 per cent, the firm’s beta equals 1.50 and the return on market
portfolio equals 12.5 percent. Compute the cost of equity capital.
2. The risk free interest rate (Rf) and market rate (Rm) , of a security is 7% and
15% respectively. Find out the cost of equity capital on the basis of the
CAPM given that the ß factor is 0.863

3. a. A firm’s after tax cost of capital of the specific sources is as follows:

Source cost
Debt 8%
Preference Capital 14%
Equity Capital 17%

Following is the Capital structure:

Source Amount
Debt Rs 3,00,000
Preference Capital 2,00,000
Equity Capital 3,00,000
Calculate the WACC using book value weights.

b. In the same question as above, calculate the WACC assuming that the
market value of different sources is as follows:
Source Amount
Debt Rs 2,70,000
Preference Capital 2,30,000
Equity and retained earnings 7,50,000

c. Above Firm wishes to raise Rs 5,00,000 for expansion of its plants. It

estimates that Rs 1, 00,000 will be available as retained earnings and the
balance of additional funds would be raised as follows:
Debt Rs 3,00,000
Preference Capital 1,00,000
Using Marginal Weights, compute the WACC.
 4. In considering the most desirable capital structure for a company, the
following estimates of the cost of capital have been made at various levels of
debt- equity mix:
Debt as % of
Total capital Cost of
employed Debt Cost of Equity
% %
0 7 15
10 7 15
20 7 15.5
30 7.5 16
40 8 17
50 8.5 19
60 9.5 20
You are required to find out the optimum capital structure.