COST OF CAPITAL:

Q.1. The Capital Structure of Taxas Traders Ltd. As on 31st March 2022 is as follows:
(Rs. In Crores)
Equity Capital: 100 lakhs equity shares of Rs. 10 Each 10
Reserves 2
14% Debentures of Rs. 100 each 3
The company expected To pay dividend at Rs. 2 for the next year. As the company is market
leader with good future, dividend is likely to grow by 5% every year. The equity shares are
now traded at Rs. 80 per share in the stock exchange. Income Tax rate applicable to the
company is 20%.
Find out: Weighted cost of capital based on market value.

Q.2. Beyond Ltd. Has furnished the following information:

Earnings per share (EPS) Rs.4
Dividend Payout Ratio 25%
Market price per share Rs. 40
Rate of Tax 20%
Growth rate of Dividend 8%
The company wants to raise additional capital of Rs. 10 lakhs including debt of Rs. 4 lakhs.
The cost of debt (before Tax) is 10% up to Rs. 2 lakhs and 15% beyond that.
Compute the after tax cost of equity and debt and the Weighted Average Cost of Capital.

Q.3.Sunshine Enterprises Ltd. Provides the following extracts from its accounts as on 31st
March, 2022.
Rs.
Capital & Reserves 1,50,00,000
Debt:
ICBI Loan (12%) 1,00,00,000
ACD Loan (13.5%) 2,50,00,000
Capital Employed 5,00,00,000
Provision before Tax 1,80,00,000
Provision for Tax (45,00,000)
Provision after Tax (PAT) 1,35,00,000

The risk-free rate of return in the company is 10% and the premium expected from business
in general is 5%. The beta of Sunshine Enterprises Ltd. Shares is currently 1.28.
a. Workout the weighted Average Cost of Capital (WACC) in percentage terms
(accurate to two decimal places).
b. If beta is reduced to 1.18in future, what will be the impact on the WACC?

Q.4. The following is the capital structure of the company:

Sources of Capital Book Value Market Value
Rs. Rs.
Equity share @ 100 each 80,00,000 1,60,00,000
9% Cumulative Preference shares
@ Rs. 100 each 20,00,000 24,00,000
11% Debentures 60,00,000 66,00,000
Retained Earnings 40,00,000 -
2,00,00,000 2,50,00,000
The current market price of the company’s equity share is Rs. 200. For the last year the
company had paid equity dividend at 25% and its dividend is likely to grow 5% every year.
The corporate tax rate is 30% and shareholders personal income tax rate is 20%.
You are required to calculate:
i. Cost of Capital for each source of capital
ii. Weighted Average Cost of Capital on the basis of book value weights.
iii. Weighted average Cost of Capital on the basis of market value weights.

Q.5. The present capital structure of a company is as follows:

(Rs. In millions)
Equity Shares (face value Rs. 100) 500
Reserve 320
9% Preference shares (face value Rs. 100) 180
10% Debentures (face value Rs. 100) 180
12%Term Loan 500
1,680
Additionally the following information are available:
Company’s Equity beta 1.25
Yield on long-term treasury bonds 6%
Stock Market Risk Premium 10%
Current ex-dividend equity share price Rs. 160
Current ex-dividend preference share price Rs. 125
Current ex –interest debenture market value Rs. 103
Corporate Tax Rate 20%
The debentures are redeemable after 3 years and interest is paid annually. Ignoring Floatation
cost, calculate the company’s Weighted Average Cost of Capital (WACC).

Q.6. Following information is given to you by NSZ Ltd.

EBIT Rs. 3,50,000
Capital Structure:
Equity Capital Rs. 4,25,000
Reserves & Surplus Rs. 3,25,000
10% Debentures Rs. 10,00,000
Dividend at the end of the year (D) Rs. 35 per share
Market value of shares Rs. 1,400 per share
Growth rate 15%
Income Tax Rate 20%
Calculate Economic Value Added (EVA) with the help of the above information.

Q.7. Calculate Economic Value added (EVA) with the help of the following information of H
Ltd.
Financial Leverage 1.4 times
Capital Structure:
Rs. 170 lakhs
Equity Capital
Rs. 130 lakhs
Reserves & Surplus
Rs. 400 lakhs
10% Debentures
17.5%
Cost of Equity
20%
Income Tax Rate

Q. 8. A company has issued 5,000 equity shares of r 100 each. Its current market price is r 95
per share and the current dividend is r 4.5 per share. The dividends are expected to grow at
the rate of 6%. Compute the cost of equity capital

Q.9. A company has currently 10,000 equity shares of `100 each and its’ earnings are r
150,000. Its’ current market price is r112 and the growth rate of EPS is expected to be 5%.
Calculate the cost of equity.