Problem 1

Calculate the cost of capital in the following cases:

i) X Ltd. issues 12% Debentures of face value Rs. 100 each and realizes Rs. 95 per Debenture.
The Debentures are redeemable after 10 years at a premium of 10%.
ii) Y. Ltd. issues 14% preference shares of face value Rs. 100 each Rs. 92 per share. The shares
are repayable after 12 years at par.
Note: Both companies are paying income tax at 50%.

Problem 2
a) A company raised preference share capital of Rs. 1,00,000 by the issue of 10% preference share of
Rs. 10 each. Find out the cost of preference share capital when it is issued at (i) 10% premium, and
(ii) 10% discount.
b) A company has 10% redeemable preference share which are redeemable at 6the end of 10 th year
from the date of issue. The underwriting expenses are expected to 2%. Find out the effective cost of
preference share capital.
c) The entire share capital of a company consist of 1,00,000 equity share of Rs. 100 each. Its current
earnings are Rs. 10,00,000 p.a. The company wants to raise additional funds of Rs. 25,00,000 by
issuing new shares. The flotation cost is expected to be 10% of the face value. Find out the cost of
equity capital given that the earnings are expected to remain same for coming years.

Problem 3
A company is considering raising of funds of about Rs. 100 lakhs by one of two alternative method,
viz., 14% institutional term loan or 13% non-convertible debentures. The term loan option would
attract no major incidental cost. The debentures would have to be issued at a discount of 2.5% and
would involve cost of issue of Rs. 1,00,000.
Advise the company as to the better option based on the effective cost of capital in each case.
Assume a tax rate of 50%.

Problem 5
The following information has been extracted from the balance sheet of Fashions Ltd. as on 31-12-
1998:
Rs. in Lacs
Equity share capital 400
12% debentures 400
18% term loan 1,200
a) Determine the weighted average cost of capital of the company. It had been paying dividends at a
consistent rate of 20% per annum.
b) What difference will it make if the current price of the Rs. 100 share is Rs. 160?
c) Determine the effect of Income Tax on the cost of capital under both premises (Tax rate 40%).

Problem 6
The following information is available from the Balance Sheet of a company
Equity share capital 20,000 shares of Rs. 10 each Rs. 2,00,000
Reserves and Surplus Rs. 1,30,000
8% Debentures Rs. 1,70,000
The rate of tax for the company is 50%. Current level of Equity Dividend is 12%. Calculate the
weighted average cost of capital using the above figures.

Problem 7
A Limited has the following capital structure:
Equity share capital (2,00,000 shares) Rs. 40,00,000
6% preference shares 10,00,000
8% Debentures 30,00,000

The market price of the companys equity share is Rs. 20. It is expected that company will pay a
dividend of Rs. 2 per share at the end of current year, which will grow at 7 per cent for ever. The tax
rate may be presumed at 50 per cent. You are required to compute the following:
a) A weighted average cost of capital based on existing capital structure.
b) The new weighted average cost of capital if the company raises an additional Rs. 20,00,000 debt
by issuing 10 per cent debentures. The would result in increasing the expected dividend to Rs. 3 and
leave the growth rate unchanged but the price of share will fall to Rs. 15 per share.
c) The cost of capital if in (b) above, growth rate increases to 10 per cent.