COST OF EQUITY CAPITAL

01) A company issues 10,000 equity shares of Rs. 100 each at a premium of
10%. The company has been paying 25% dividend to equity shareholders
for the past five years and expects to maintain the same in the future
also. Compute the cost of equity capital. Will it make any difference if the
market price of equity share is Rs. 175?

( 22.73% | 14.29%)

02) A company issues 1,000 equity shares of Rs. 100 each at a premium of
10%. The company has been paying 20% dividend to equity shareholders
for the past five years and expects to maintain the same in the future
also. Compute the cost of equity capital. Will it make any difference if the
market price of equity share is Rs. 160?

(18.18 | )

03) A company plans to issue 10,000 new shares of Rs. 100 each at a par.
The floatation costs are expected to be 4% of the share price. The
company pays a dividend of Rs. 12 per share initially and growth in
dividends is expected to be 5%. Compute the cost of new issue of equity
shares. (b) If the current market price of an equity share is Rs. 120.
Calculate the cost of existing equity share capital

(12.5 % + 5% = 17.5% | 10 % + 5% = 15% )

04) A company plans to issue 15,000 new shares of Rs. 100 each at a par.
The floatation costs are expected to be 6% of the share price. The
company pays a dividend of Rs. 14 per share initially and growth in
dividends is expected to be 6%. Compute the cost of new issue of equity
shares. (b) If the current market price of an equity share is Rs. 140.
Calculate the cost of existing equity share capital

( 14.89% + 6% = 20.89% | 10 % + 6% = 16% )

05) The current market price of the shares of A Ltd. is Rs. 95. The floatation
costs are Rs. 5 per share. Dividend per share amounts to Rs. 4.50 and is
expected to grow at a rate of 7%. You are required to calculate the cost of
equity share capital.

(4.74 % + 7%)

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06) A Company expects a dividend of Re.1.00 per share next year and is
expected to grow at 6% per year perpetually. Determine the cost of
Capital , assuming the market price per share is Rs.25.

( Ke = 4 % + 6 % = 10%)

07) Your company’s share is quoted in the market at Rs. 40 currently. The
company pays a dividend of Rs. 5 per share and the investors market
expects a growth rate of 7.5% per year: (i) Compute the company’s equity
cost of capital. (ii) If the anticipated growth rate is 10% p.a. Calculate the
indicated market price per share.(iii) If the company’s cost of capital is
15% and the anticipated growth rate is 10% p.a. Calculate the indicated
market price if the dividend of Rs. 5 per share is to be maintained.

(Ke = 12.5 % + 7.5 % = 20%)

08) S & Co’s stock is selling at Rs.60 per share. The firm is expected to earn
Rs.5.40 per share and to pay a year end dividend of Rs.3.60. If investors
require 9% return , what is the ate of growth must be expected for S &
Co.

( 9 % = 6 % + Growth Rate)

09) The shares of a leather company are selling at Rs.30 per share. The firm
had paid dividend at the rate of Rs.3 per share last year. The estimated
growth of the company is approximately 5 % per year. Determine (a) The
Cost of equity capital of the company (b) The estimated market price of
the equity shares if the anticipated growth rate of the firm rises to 9%
and falls to 3%

(Ke = 10 % + Growth Rate 5%) ( Market Price = Rs.50)

10) A Mining Company’s iron ore reserves are being depleted and its costs of
recovering a declining quantity of iron ore are rising each year. As a
sequel to it, the company’s earnings and dividends are declining at the
rate of 8 % per year. If the previous year years dividend was Rs.10 and
the required rate of return is 15%, what would be the current price of
the equity shares of the company?

(Market Price = 9.20 / 0.23 = Rs.40)

Dividends = Rs. 10 (1- declining rate) = Rs.9.20

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EARNING PRICE APPROACH

11) A firm is considering an expenditure of Rs. 75 lakhs for expanding its

operations. The relevant information is as follows : (a) Number of existing
equity shares =10 lakhs (b) Market value of existing share =Rs.100 (c)
Net earnings =Rs.100 lakhs. Compute the cost of existing equity share
capital and of new equity capital assuming that new shares will be
issued at a price of Rs. 92 per share and the costs of new issue will be
Rs. 2 per share. (Ke =10% and 11.11%)

12) A firm is considering an expenditure of Rs. 60 lakhs for expanding its

operations. The relevant information is as follows : (a) Number of existing
equity shares =10 lakhs (b) Market value of existing share =Rs.60 (c)
Net earnings =Rs.90 lakhs. Compute the cost of existing equity share
capital and of new equity capital assuming that new shares will be
issued at a price of Rs. 52 per share and the costs of new issue will be
Rs. 2 per share. (Ke =15% and 18 %)

13) A Company is currently earning Rs. 10 Lakhs. The number of

outstanding shares of the company is 1,00,000 with current market
price of Rs.100 per share. Assume that there are no debts. Suppose the
company wants to sell additional equity shares for Rs.25 Lakhs. The
shares involve a flotation cost of 10% . Assume that earnings of the
company are stable , what is the cost of the Equity Capital?
(ke = 10 % and 11.11%)

14) ABC Ltd pays no dividends, anticipates a long – run level of future
earnings of Rs.7 per share. The current price of ABC Ltd’s share is
Rs.55.45., Flotation cost for the sale of new equity shares would average
about 10% of the price of the Shares. What is the cost of equity capital of
ABC Ltd.,? (Ke = 12.62 % and 14.03%)

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REALISED YIELD APPROACH

15) Mr.Dinakaran, a shareholder of GKM Ltd., purchased 5 shares in GKM

Ltd., at a cost of Rs.240 on 01.01.2015. Dinakaran held the shares for 5
years and finally sold the shares on 1.1.2020 for Rs.300. The amount of
dividend received by Dinakaran in each of these 5 years was as follows.
You are required to calculate cost of equity capital.

Year 2015 2016 2017 2018 2019

Amount of
Rs.14 Rs.14 Rs.14.50 Rs.14.50 Rs.14.50
Dividend received

16) Mr.Madhavan , a shareholder of LMN Ltd., purchased 4 shares in LMN

Ltd., at a cost of Rs.100 on 01.01.2014. Madhavan held the shares for 5
years and finally sold the shares on 1.1.2019 for Rs.113. For five years.
He received at the rate of 10%. You are required to calculate cost of
equity capital.

Year 2014 2015 2016 2017 2018

Amount of
Rs.10 Rs.10 Rs.10 Rs.10 Rs.10
Dividend received

17) Mr. X, a shareholder of P & Co., purchased 5 shares at a cost of Rs. 260
on 1.1.2013. He retained the shares for 5 years and sold them on
1.1.2018 for Rs. 325. The amount of dividend received by Mr.X in each of
these 5 years was as follows. You are required to calculate cost of equity
capital.

Year 2013 2014 2015 2016 2017

Amount of
Rs.15 Rs.15 Rs.16 Rs.16 Rs.16
Dividend received

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