Dividend Decision | CS Ritika Gupta

COST OF CAPITAL

1. Alpha company Ltd. Issue 10% perpetual debenture of Rs.1,00,000. The company tax rate is 50%.
Determine the cost of capital (before tax as well as after tax) assuming the debt is issued at (i) par (ii)
10% discount (iii) 10% premium.
[Ans: (i) 10%, 5% (ii) 11.11%; 5.5% (ii) 9.09%; 4.54%]

2. Beta company issue debentures of Rs.1000 each redeemable at 5 years. The debentures are issued at
discount of 5% and floatation cost 1%. Find out cost of debenture given the tax rate 50%.
[Ans: 6.39%]

3. A company issues 10% irredeemable preference shares of the face value of Rs.100 each. Floatation cost
for such issue is estimated to be 4% of issue price. What would be cost of preference shares of they are
issued at (i) par (ii) 10% premium (iii) 10% discount.
[Ans: (i) 10.41%; (ii) 9.46% (iii) 11.57%]

4. A Ltd. has issued 2,000, 10% redeemable preference shares of face value of Rs.100 each to be redeemed
after 12 years. Floatation cost is expected to be 1%. Calculate the cost of preference shares.
[Ans: 10.13%]

5. A company has issued 10% redeemable preference shares of Rs.2,00,000 redeemable after 10 years. The
floatation cost is 5%. Calculate cost of preference shares.
[Ans: 10.76%]

6. 2,00,000 debentures of Rs 250/- each are being issued at 5% discount. Coupon rate is 15%. Floatation
costs are likely to be 5% of the face value. Redemption will be after 8 years at a premium of 5%. Tax rate
is 405. Calculate cost of debt.
[Ans: 11.15%][B.COM (H), 2007]

7. A company has declared dividend of Rs4 last year and the expected growth rate in dividend is 8%. Find
the cost of equity capital if the current share price of company is (i) Rs.30 and (ii) Rs35.
[Ans: (i) 22.4% (ii) 20.34%]
8. Assuming that the company pays tax at 40%, compute the after tax cost on following cases:
i) 15% preference shares sold at par.
ii) A perpetual bond sold at par, coupon rate being 15%.
iii) A ten year 8% Rs.1000 per bond sold at Rs.950/
iv) An equity shares selling at market price of Rs.110 and paying a current dividend of Rs10 per share
which is expected to grow at rate of 10%.
[Ans: (i) 15% (ii) 9% (iii) 5.43% (iv) 20%] [B.COM (H),2011]
CS Ritika Gupta, Assistant Professor, Department of Commerce, Satyawati College (Eve.)
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9. Assuming that the firm pays tax at a 30% rate, compute the after tax cost of capital in the following cases:
a) A 14.5% preference shares sold at par
b) A perpetual bond sold at par, coupon rate being 13.5%.
c) A ten year 8% Rs. 1000 per bond sold at Rs. 950/-.
d) A common share selling at a market price of Rs.120 and paying a current dividend of Rs.9 per share
which is expected to grow at a rate of 8%.
e) 14% Preference shares of Rs. 100 each, issued at 5% premium, redeemable at par after 6 years.
Floatation cost is Rs. 8/- and dividend distribution tax is 15%. Use both methods.
f) 12% debentures of face value of Rs. 1,000 each redeemable at par after 5 years, floatation cost being
5%. Use both methods given the tax @ 30%.

[Ans: (a) 14.5%, (b) 9.45% , (c) 6.26% , (d) 16.1% ( e ) (i) 16.85% (ii) 16.94% (d) (i) 9.64% (ii) 9.72%]

10. XYZ company has the following capital structure on 1st July 2017:,
Equity shares (4,00,000 @ Rs20) Rs. 80,00,000
10% Preference Shares Rs. 20,00,000
10% Debentures Rs. 60,00,000
Rs. 1,60,0000
The share of the company currently sells for Rs.25/-. It is expected that the company will pay a dividend
of Rs.2 per share which will grow at 7% forever. Assuming a 30% tax rate. You are required to compare
WACC on existing capital structure.
[Ans: kd: 7%, ke: 15%, WACC: 11.375%]

11. Your company shares is quoted in the market at Rs.20 currently. The company has paid a dividend of
Rs.1/share and the investors market expects a growth rate of 5% per share. You are required to compute.
i) The company equity cost of capital.
ii) If the company cost of capital is 8% and the anticipated growth rate is 5% p.a. calculate market price
of the dividend of Rs.1 is to be paid at the end of 1 year.
[Ans: (i) 10.25% (ii) Rs.33.33 ]

12. The following figures are taken from the current balance sheet of DNY & CO.
Capital 8,00,000
Share Premium 2,00,000
Reserves 6,00,000
Shareholder’s Fund 16,00,000
12% Perpetual Debentures 4,00,000
An annual ordinary dividend of Rs 2/share has just been paid. In the past, ordinary dividends have grown
at a rate of 10% p.a. and the rate of growth is expected to continue. Annual interest has recently been

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 Dividend Decision | CS Ritika Gupta

paid on the debentures. The ordinary shares are currently quoted at Rs.27.50 and the debenture at 80%.
Ignore taxation.
You are required to estimate WACC (based on market value) for DNY & CO.
[Ans: wacc = 17.6%]

13. The following information has been extracted from the balance sheet of Fashion Ltd.
Rs.(in lacs)
Equity share capital 400
12% Debentures 400
18% term loan 1200
2000
a) Determine the WACC of the company. It had been paying dividend at a consistent rate of 20% p.a.
shares and debentures are being traded at par. Tax rate is 30%.
b) What difference will it make if the current price of Rs.100 share is Rs.160/-?
[Ans: (a) 13.24% (b) 11.74%]

14. PQR & CO. has the following capital structure as on Dec.31:
Equity share capital (5000 shares of Rs.100 each) 5,00,000
9% Preference shares 2,00,000
10% Debentures. 3,00,000
The equity shares of the company are quoted at Rs.102/- and the company is expected to declare
dividend of Rs. 9/- share for the next year. The company has registered dividend growth rate of 5% which
is expected to be maintained.
i) Assuming the applicable tax rate i.e.30% , calculate WACC.
ii) Assuming that the company can raise additional term loan at 12% for Rs.5,00,000 to finance its
expansion. Calculate the revised WACC. The company’s expectation is that the business risk
associated with new financing may bring down the market price from Rs.102 to Rs.96 per share.
[Ans: (a) 14.4% (b) 10.18%]

15. International food ltd. has the following capital structure

Book Value Market Value
Equity shares ( 25000 shares @ Rs 10 each) 2,50,000 4,50,000
13% Preference Shares (500 shares @ Rs 100 each) 50,000 45,000
Reserves and Surplus 1,50,000 -
12% Debentures (1500 debentures @ Rs100 each) 1,50,000 1,45,000
6,00,000 6,00,000
The expected dividend per share is Rs.1.40 and the dividend per share is expected to grow @ 8% forever.
Preference shares are redeemable after 5 years at par whereas debentures are redeemable after 6 years

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 Dividend Decision | CS Ritika Gupta

at par. The tax rate for the company is 30%. You are required to calculate WACC for existing capital
structure using market value as weights.
[Ans: wacc: 14.25%]

16. A Ltd. has the following capital structure:

Equity share capital (2,00,000 shares) 40,00,000
6% Preference Shares 10,00,000
8% Debentures 30,00,000
80,00,000
The market price of the company’s equity shares is Rs.20. It is expected that company will pay dividend
of Rs.2 Per share at the end of current year. Which will grow at 7% forever. The tax rate is 30%. You are
required to calculate:
i) A WACC based on existing capital structure.
ii) The new WACC if the company raises additional Rs.20,00,000 debt by issuing 10% debentures. This
would result in increasing the expected dividend to Rs.3 and leave the growth rate unchanged but
price of share will fall to Rs. 15 per share.
iii) The cost of capital if in (ii) above, growth rate increases to 10%.
[Ans: (i) 11.35% (ii) 14.50% (iii) 15.70%]

17. An electric equipment manufacturing company wishes to determine WACC for evaluating capital
budgeting projects. You have been supplied with following information :
BALANCE SHEET
Liabilities Amount Assets Amount
Equity share capital 12,00,000 Fixed assets 25,00,000
Pref. Share Capital 4,50,000 Current assets 15,00,000
Retained Earnings 4,50,000
Debentures 9,00,000
Current liabilities 10,00,000
40,00,000 40,00,000
Additional Information:
i) 20 years, 14% Debentures of Rs.2, 500 face value, redeemable at 5% premium can be sold at par. 2%
Flotation cost.
ii) 15% Preference Shares: Sale price Rs. 100 per share, 2% Flotation costs.
iii) Equity shares: Sale Price Rs. 115 per share, floatation cost Rs.5 per share.
The corporate tax rate is 35% and the expected growth in equity dividend is 8% per year. The expected
dividend at the end of current financial year is Rs. 11 per share. Assume that the company is satisfied
with its present capital structure and intends to maintain it.
[Ans: kd= 9.31%; kp=15.30%; ke= 18%; WACC: 14.98%]

CS Ritika Gupta, Assistant Professor, Department of Commerce, Satyawati College (Eve.)

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 Dividend Decision | CS Ritika Gupta

18. The latest balance sheet of D ltd. is given below:

(Rs.000)
Ordinary shares (50,000 shares) 500
Share premium 100
Retained earnings 600
1200
8% Preference shares 400
13% perpetual debt (Face Value Rs100 each) 600
2200
The ordinary shares are currently priced at Rs39 ex-dividend each and Rs25 preference shares is priced
at Rs18 cum-dividend. The debentures are selling at 110% ex-interest and tax is paid by D.Ltd at 30%. D
Ltd. cost of equity has been estimated at 19%.
Calculate WACC of D Ltd.
[Ans: ke=19%; kp=12.5%; kd= 8.27%; WACC = 15.94%]

19. Determine the WACC using (i) Book value weights (ii) Market value weights based on the following
information:
Book value structure:
Debentures (Rs.100 Per debenture) 8,00,000
Preference share(Rs.100 per share) 2,00,000
Equity shares (Rs.10 per share) 10,00,000
20,00,000
Recent market prices of all securities are Debentures = Rs110 per debenture. Preference share = Rs 120
per share and Equity shares: Rs22 per share.
External financing opportunities are:
i) Rs.100 per debenture redeemable at par, 10 year, maturity, 13% coupon rate, 4% floatation cost and
sale price Rs100.
ii) Rs.100 per preference share redeemable at par; 10 years maturity, 14% dividend rate , 5% floatation
cost and sale price Rs100; and
iii) Equity share = Rs 2 per share floatation cost and sale price Rs22.
Dividend expected on equity shares at the end of the year is Rs2 per share, anticipated growth rate in
dividend is 7%. Company pays all earnings in the form of dividend. Corporate tax is 30%.

[Ans: kd=9.69; ke=14.9%; ke=17%; WACC (BV) = 13.86%; WACC (MV) = 14.91%]

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 Dividend Decision | CS Ritika Gupta

20. X Ltd. has assets of Rs. 32,00,000 that have been financed by Rs. 18,00,000 of equity shares (of Rs.100
each), General Reserve of Rs.3,60,000 and Debt of Rs.10,40,000. For the year ended 31-3-2016 and the
company’s total profits before interest and taxes were Rs6,23,000. X ltd. pays 8% interest on borrowed
capital and is in a 30% tax bracket. The market value of equity as on 31-3-2016 was Rs 150 per share.
What was the WACC? Use market Value as weights?
[Ans: kd=5.6%; ke=14%; WACC=11.73%][B.COM (H), 2010]

21. ABC Ltd. declared dividend of Rs 4 per share last year. The company expects to maintain growth rate as
per schedule:
Years Growth rate
1 to 3 8%
4 6%
5 8%
th
6 onwards 9%
If expected rate of return is 15%, advise whether the share should be bought if its price is Rs.80.
[Ans: 68.44 rupees]

22. X Ltd. has operating profit of Rs. 8,60,000 and a fixed finance burden of Rs.60,000. The company is
subject to income tax payment of Rs.2,00,000. The company has 3,00,000 equity shares of Rs. 30,00,000
and 18% debentures of Rs.3,12,500. The market price of equity shares is 12. Find
a) EPS
b) Cost of equity
c) Cost of debt.
[Ans: (a) Rs.2 (b) 16.67% (c) 13.5%] [B.com (h), 2007]
23. ABC ltd. has the following capital structure:
Rs.
Equity shares capital (400000 shares of Rs.10 each) 40,00,000
12% Preference Shares 4,00,000
10% Debentures 6,00,000
The equity shares of the company are quoted at Rs.110 and the company is expected to declare dividend
of Rs15 per share. Rate of growth of dividend is 8%, which is expected to be maintained.
i) Assuming the tax rate of 40%, calculate WACC.
ii) The company want to raise the additional term loan of Rs. 5,00,000 at 10%. Calculate the revised
WACC assuming the market price of equity shares has gone down to Rs.105.
[Ans: (i) 18.96% (ii) 18.30%] [B.COM (H), 2013]

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 Dividend Decision | CS Ritika Gupta

24. The balance sheet of M/s XYZ Company shows the following items as at 31st Dec. 2009.
Sources Rs.
Paid up capital: 4,00,000 equity shares of Rs.10
each 40,00,000
Reserve and Surplus 60,00,000
15% Non – Convertible Debentures 20,00,000
14% Institutional Loan 60,00,000
Other relevant information about the company is given below:
Year ended 31st Dec Dividend per share (Rs.) Earnings per share (Rs.) Market price per share(Rs.)
2009 4 7.50 50
2008 3 6 40
2007 4 4.50 30
Calculate weighted average cost of capital?
[Ans: ko=11.50%] [B.COM (H),2000]

25. A limited company has the following capital structure:

Equity shares (2,00,000 shares) 40,00,000

6% Preference Shares 10,00,000
8% Debentures 30,00,000

The market price of the company’s equity share is Rs.20. It is expected that the company will pay current
dividend of Rs.2 per share. It will grow at 7% forever. The tax may be presumed at 50%. You are required
to compute the following.
i) A WACC of existing capital structure.
ii) The new WACC if the company raises an additional Rs.20,00,000 debt by issuing 10% debentures.
This would result in increasing the expected dividend to Rs.3 and leave the growth rate unchanged
but the price of the shares will fall to Rs.15 per share.
[Ans: (i) 10.75% (ii) 13.60%] [B.COM (H), 2013]

26. Silver Ltd. has the following capital structure:

Equity shares (5000 shares @ Rs. 100 each) 5,00,000
9% preference shares 1,50,000
12% Debentures 3,50,000
10% term loan 5,00,000
The equity shares of the company has current market price of Rs. 105 and the company declares dividend
of Rs.9 per share for the next year. The dividend growth rate is 5% p.a. Tax rate is 50%. Calculate WACC.
[Ans: 8.49%] [BBS, DU 2014]

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 Dividend Decision | CS Ritika Gupta

27. The capital structure of XYZ Ltd. is as under:

9% debentures 2,75,000
11% Preference shares 2,25,000
Equity shares (face value Rs.10 per share) 5,00,000
10,00,000

Additional information:
i) Rs.100 per debentures redeemable at par, has 2% floatation cost and 10 years of maturity. The
market price per debentures if Rs.105.
ii) Rs.100 per preference share redeemable at par, has 3% floatation cost and 10 years of maturity. The
market price per preference share is Rs.106.
iii) Equity share has Rs.4 floatation cost and MPS of Rs.24. The expected dividend is Rs.2 per share with
annual growth of 5%. The firm has a practice of paying all earnings in the form of dividends.
iv) Corporate income tax rate is 35%.
[Ans: (i) 5.48% (ii) 10.57% (iii) 15% ; ko= 12.80%] [B.COM (H),2012]

28. X Ltd. has assets of Rs. 32,00,000 that have been financed by Rs.18,00,000 of equity share (of Rs.100
each), General Reserve of Rs.3,60,000 and Debt of Rs.10,40,000. For the year ended 31-03-2010 the
company’s total profit before interest and taxes were Rs.6,23,000. X Ltd. pays 8% interest on borrowed
capital and is in 40% tax bracket. The market value of equity as on 31-03-2010 was Rs.150 per share.
What was the WACC? Use market values as weights?
[Ans: (a) EPS = Rs.18 (b) ko = 10%] [B.COM (H), 2010]

29. The following is the capital structure of M/s Sim Company Ltd. as on 31 st March current year:
Book value structure Rs.
Equity Share capital: 10,000 shares of 100 each 10,00,000
12% Preference Shares of Rs.100 each 4,00,000
10% Debenture 6,00,000
The market value of company’s share is Rs.110 and it is expected that a dividend of Rs.10 per share will
be declared at the end of current year. The dividend growth rate is 6%.
i) If company is in 35% tax bracket, compute WACC based on market weights.
ii) Assuming that in order to finance an expansion plan, the company intend to borrow a fund of Rs.10
lakh, bearing 12% rate of interest, what will be company’s revised WACC?
This financing decision will expects to increase dividend from Rs.10 to Rs.12 per share. However, the
market price of equity shares is expected to decline from Rs.110 to Rs.105 per share.
[Ans: existing: Kd: 6.5%, Kp: 12%, Ke: 15.09%, Wacc: 12.05% , After expansion: Kd: 6.5% & 7.8%, Kp: 12%,
Ke:17.43%, Wacc: 11.41%] [B.COM (H), 2015]

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 Dividend Decision | CS Ritika Gupta

30. XYZ ltd. has the following book value capital structure
Source of Funds Rs.in crores
Equity Share capital(Rs. 10 each) 15
12% Preference Shares of Rs.100 each 1
Retained earnings 20
11.5% Debenture (Rs.100 each) 10
11% term loan 12.5
The next expected dividend on equity shares is Rs.3.60 per share, the dividend per share is expected to
grow at 7%. The market price per share is Rs.40. Preference stock, redeemable after 10 years, is currently
selling at Rs.75 per share. Debenture, redeemable after 6 years are selling at Rs.80 per debenture. The
income tax rate of the company is 40%. Calculate WACC by using i) book value weights ii) Market value
weights.
[Ans: Kd: 11.37%, Ke: 16%, Kp: 16.6%, Ktl: 6.6%, WACC (book value weights): 13.20%, WACC (market
value weights): 14.10%] [B.COM (H), 2016]

31. Following is the capital structure of XYZ Ltd:

Source of Funds Rs.
Equity Share capital(Rs. 10 each) 15,00,000
12% Preference Shares of Rs.100 each 4,00,000
8% Debenture (Rs.100 each) 4,00,000
10% term loan 7,00,000
Total 30,00,000
The company paid a dividend of Rs.3 per share last year. The dividend are expected to grow at 5% p.a.
Tax rate applicable to company is 30%. All securities are traded in the capital market and the recent
market prices are:
Equity shares Rs.15
Debenture Rs.80
Preference share Rs.100
Find out WACC using Book weights and market weights.
[Ans: Kd: 7%, Ke: 26%, Kp: 12%, Ktl: 7%, WACC (BV): 13.93%, WACC (MV): 19.19%][B.COM (H),2017]

CS Ritika Gupta, Assistant Professor, Department of Commerce, Satyawati College (Eve.)

Contact: ritikagupta.commerce@satyawatie.du.ac.in 9