Inspiria Knowledge Campus

2021-2024
Affiliated to
Maulana Abul Kalam Azad University of
Technology
West Bengal

Subject Name- Financial Management Submitted

By- SIDDHARTH ROUTH
Subject Code- BBA ATA 601
Registration No.- 213442051410025(2021-22)
Roll No.- 34451421042
Illustration :-
1.Calculate the cost of capital from the following:-
(i) A company issued 10000 ,12% Debentures @ Rs. 100 each for 6 years at a
premium of Rs. 20 each. brokerage 2% and Tax rate 40%.
(i) Also issued 5000 , 10% Preference shares @ Rs. 100 each at a discount of 10%
for
5 years. Brokerage 2% and Tax Rate 40%. Show the % of cost.
Solution :-
(i) Cost of Debt
Face value per debenture = Rs. 100
● Premium per debenture = Rs. 20
● Number of debentures issued = 10,000
● Brokerage = 2% of the total amount raised
● Tax rate = 40%
● Maturity period = 6 years
Total amount raised from debentures = (Face value + Premium) ×Number of
debentures
= (100 + 20) ×10,000
= Rs. 1,200,000
Brokerage on debentures = 2% of Rs. 1,200,000 = Rs. 24,000
Net amount received from debentures = Total amount raised - Brokerage
= Rs. 1,200,000 - Rs. 24,000
= Rs. 1,176,000
Annual interest payment on debentures = Face value ×Interest rate
= Rs. 100 ×12% = Rs. 12 per debenture
Total annual interest payment = 12 ×10,000 = Rs. 120,000
After-tax cost of debentures = (Interest payment - Tax shield on interest) / Net
amount
received
from debentures
= (120,000 - (120,000 ×0.4)) / 1,176,000
= (120,000 - 48,000) / 1,176,000
= 72,000 / 1,176,000
=0.061224 × 100
=6.12%
Solution :-
(ii) Cost of Preference Capital
Face value per preference share = Rs. 100
Discount = 10%
Number of preference shares issued = 5,000
Brokerage = 2% of the total amount raised
Tax rate = 40%
Maturity period = 5 years
Total amount raised from preference shares = (Face value - Discount) ×Number
of shares
= (100 - 10% of 100) ×5,000
= Rs. 90 × 5,000
= Rs. 450,000
Brokerage on preference shares = 2% of Rs. 450,000 = Rs. 9,000
Net amount received from preference shares = Total amount raised - Brokerage
= Rs. 450,000 - Rs. 9,000
= Rs. 441,000
Annual dividend payment on preference shares = Face value × Dividend rate
= Rs. 100 × 10% = Rs. 10 per share
Total annual dividend payment = 10 ×5,000 = Rs. 50,000
After-tax cost of preference shares = (Dividend payment - Tax shield on dividend)
/ Net
amount
received from preference shares
= (50,000 - (50,000 × 0.4)) / 441,000
= (50,000 - 20,000) / 441,000
= 30,000 / 441,000
= 0.068027 × 100
=6.80%
Therefore, the cost of capital from debentures is approximately 6.12%, and the
cost of capital
from preference shares is approximately 6.80%.