Cost of Capital

Question Bank
Q1. May 2020 (RTP)
1. PK Ltd. has the following book-value capital structure as on March 31, 2020.

(`)
Equity share capital (10,00,000 shares) 2,00,00,000
11.5% Preference shares 60,00,000
10% Debentures 1,00,00,000
3,60,00,000
The equity shares of the company are sold for ` 200. It is expected that the company will pay
next year a dividend of ` 10 per equity share, which is expected to grow by 5% p.a. forever.
Assume a 35% corporate tax rate.
Required:
(i) COMPUTE weighted average cost of capital (WACC) of the company based on the existing
capital structure.
(ii) COMPUTE the new WACC, if the company raises an additional `50 lakhs debt by issuing 12%
debentures. This would result in increasing the expected equity dividend to `12.40 and leave the
growth rate unchanged, but the price of equity share will fall to ` 160 per share.
Q2. November 2020 (RTP)
1. CALCULATE the WACC using the following data by using:
(a) Book value weights
(b) Market value weights
The capital structure of the company is as under:
Particulars (`)
Debentures (` 100 per debenture) 5,00,000
Preference shares (` 100 per share) 5,00,000
Equity shares (` 10 per share) 10,00,000
20,00,000
The market prices of these securities are:
Debentures ` 105 per debenture
Preference shares ` 110 per preference share
Equity shares ` 24 each.
Additional information:
(i) ` 100 per debenture redeemable at par, 10% coupon rate, 4% floatation costs, 10-year
maturity.

(ii) ` 100 per preference share redeemable at par, 5% coupon rate, 2% floatation costand 10-year
maturity.
(iii) Equity shares has ` 4 floatation cost and market price ` 24 per share.
The next year expected dividend is ` 1 with annual growth of 5%. The firm has practice of
paying all earnings in the form of dividend.
Corporate tax rate is 30%. Use YTM method to calculate cost of debentures and preference
 shares.
Q3. November 2021 (RTP)
1. Kalyanam Ltd. has an operating profit of ` 34,50,000 and has employed Debt which gives total Interest
Charge of ` 7,50,000. The firm has an existing Cost of Equity and Cost of Debt as 16% and 8%
respectively. The firm has a new proposal before it, which requires funds of ` 75 Lakhs and is expected
to bring an additional profit of ` 14,25,000. To finance the proposal, the firm is expecting to issue an
additional debt at 8% and will not be issuing any new equity shares in the market. Assume no tax
culture.
You are required to CALCULATE the Weighted Average Cost of Capital (WACC) of
Kalyanam Ltd.:
(i) Before the new Proposal
(ii) After the new Proposal
Q4. May 2022 (RTP)
1. The information relating to book value (BV) and market value (MV) weights of Ex Limited is given
below:
Sources Book Value (`) Market Value (`)
Equity shares 2,40,00,000 4,00,00,000
Retained earnings 60,00,000 -
Preference shares 72,00,000 67,50,000
Debentures 18,00,000 20,80,000

Additional information:
I. Equity shares are quoted at ` 130 per share and a new issue priced at ` 125 per share will be
fully subscribed; flotation costs will be ` 5 per share on face value.
II. During the previous 5 years, dividends have steadily increased from ` 10 to ` 16.105 per share.
Dividend at the end of the current year is expected to be ` 17.716 per share.
III. 15% Preference shares with face value of ` 100 would realise ` 105 per share.
IV. The company proposes to issue 11-year 15% debentures but the yield on debenturesof similar
maturity and risk class is 16%; flotation cost is 2% on face value.
V. Corporate tax rate is 30%.
You are required to DETERMINE the weighted average cost of capital of Ex Limited usingboth
the weights.
Q2. November 2022 (RTP)
1. Bounce Ltd. evaluates all its capital projects using discounting rate of 15%. Its capital structure
consists of equity share capital, retained earnings, bank term loan and debentures redeemable
at par.
Rate of interest on bank term loan is 1.5 times that of debenture. Remaining tenure of
debenture and bank loan is 3 years and 5 years respectively. Book value of equity share
capital, retained earnings and bank loan is ` 10,00,000, ` 15,00,000 and ` 10,00,000
respectively. Debentures which are having book value of ` 15,00,000 are currently trading at `
97 per debenture. The ongoing P/E multiple for the shares of the company stands at
5. You are required to CALCULATE the rate of interest on bank loan and debentures if tax rate
applicable is 25%.
March, 2018 (MTP)
(a) A company had paid dividend of ` 2 per share last year. The estimated growth of the dividends
from the company is estimated to be 5% p.a. DETERMINE the estimated market price of the equity
 share if the estimated growth rate of dividends (i) rises to 8%, and (ii) falls to 3%. Also COMPUTE the
present market price of the share, given that the required rate of return of the equity investors is
15.5%.
March, 2018 (MTP)
2. G Limited has the following capital structure, which it considers to be optimal:
Capital Structure Weightage (in %)
Debt 25
Preference Shares 15
Equity Shares 60
100

G Limited’s expected net income this year is ` 34,285.72, its established dividend payout ratio is 30
per cent, its tax rate is 40 per cent, and investors expect earnings and dividends to grow at a
constant rate of 9 per cent in the future. It paid a dividend of ` 3.60 per share last year, and its
shares currently sells at a price of ` 54 per share.
G Limited requires additional funds which it can obtain in the following ways:
• Preference Shares: New preference shares with a dividend of ` 11 can be sold to the public at a price
of `95 per share.
• Debt: Debt can be sold at an interest rate of 12 per
cent.You are required to:
(i) DETERMINE the cost of each capital structure component; and
(ii) COMPUTE the weighted average cost of capital (WACC) of G Limited.

August, 2018 (MTP)

(a) PQR Ltd. has the following capital structure on October 31, 20X8:
Sources of capital (Rs.)
Equity Share Capital (2,00,000 Shares of Rs. 10 each) 20,00,000
Reserves & Surplus 20,00,000
12% Preference Shares 10,00,000
9% Debentures 30,00,000
80,00,000
The market price of equity share is Rs. 30. It is expected that the company will pay next
year adividend of Rs. 3 per share, which will grow at 7% forever. Assume 40% income tax
rate.
You are required to COMPUTE weighted average cost of capital using market value weights.
April, 2019 (MTP)
(a) Annova Ltd is considering raising of funds of about Rs.250 lakhs by any of two alternative methods, viz.,
14% institutional term loan and 13% non-convertible debentures. The term loan option would attract no
major incidental cost and can be ignored. The debentures would have to be issued at a discount of 2.5%
and would involve cost of issue of 2% on face value.
ADVISE the company as to the better option based on the effective cost of capital in each case. Assume
a tax rate of 50%.

October, 2020 (MTP)

1. P Ltd. has the following capital structure at book-value as on 31st March, 2020:
 Particulars (`)
Equity share capital (10,00,000 shares) 3,00,00,000
11.5% Preference shares 60,00,000
10% Debentures 1,00,00,000
4,60,00,000

The equity shares of the company are sold for ` 300. It is expected that the company will pay next
year a dividend of ` 15 per equity share, which is expected to grow by 5% p.a. forever. Assume a
35% corporate tax rate.
Required:
(i) COMPUTE weighted average cost of capital (WACC) of the company based on the existing capital
structure.
(ii) COMPUTE the new WACC, if the company raises an additional ` 50 lakhs debt by issuing 12%
debentures. This would result in increasing the expected equity dividend to ` 20 and leave the growth
rate unchanged, but the price of equity share will fall to ` 250 per share.
March, 2021 (MTP)
1. CALCULATE the WACC by using Market value weights.
The capital structure of the company is as under:

(Rs.)
Debentures (Rs.100 per debenture) 10,00,000
Preference shares (Rs.100 per share) 10,00,000
Equity shares (Rs.10 per share) 20,00,000
40,00,000
The market prices of these securities are:
Debentures Rs. 115 per debenture
Preference shares Rs. 120 per preference
shareEquity shares Rs. 265 each.
Additional information:
(1) Rs.100 per debenture redeemable at par, 10% coupon rate, 2% floatation cost,10-year
maturity.
(2) Rs.100 per preference share redeemable at par, 5% coupon rate, 2% floatation cost and 10 - year
maturity.
(3) Equity shares have a floatation cost of Rs. 1 per share.
The next year expected dividend is Rs. 5 with an annual growth of 15%. The firm has
thepractice of paying all earnings in the form of dividend.
Corporate tax rate is 30%. Use YTM method to calculate cost of debentures and preference shares.
April, 2021 (MTP)
(a) In March, 2021 Tiruv Ltd.'s share was sold for Rs. 219 per share. A long term earnings growth rate of
11.25% is anticipated. Tiruv Ltd. is expected to pay dividend of Rs. 5.04 per share.
(i) DETERMINE the rate of return an investor can expect to earn assuming that dividends are
expected to grow along with earnings at 11.25% per year in perpetuity?
(ii) It is expected that Tiruv Ltd. will earn about 15% on book equity and shall retain 60% of
earnings. In this case, whether, there would be any change in growth rate and cost of equity?
ANALYSE.
April, 2021 (MTP)
Development Finance Corporation issued zero interest deep discount bonds of face value of Rs. 1,50,000
each issued at Rs. 3,750 & repayable after 25 years. COMPUTE the cost of debt if there is no corporate tax.
November, 2021 (MTP)/ March, 2022 (MTP)
(a) XYZ Company’s equity share is quoted in the market at ` 25 per share currently. The
company pays a dividend of ` 5 per share and the investor’s market expects a growth rate
of 5% per year.
You are required to:
(i) CALCULATE the company’s cost of equity capital.
(ii) If the company issues 12% debentures of face value of ` 100 each and realises ` 95 per
debenture while the debentures are redeemable after 10 years at a premium of
12%, CALCULATE cost of debenture using YTM?
Assume tax rate to be 30%.
April, 2022 (MTP)
1. The capital structure of RV Limited as on 31st March, 2022 as per its Balance Sheet is as follows:
Particulars `
Equity shares of ` 10 each 25,00,000
10% Preference shares of ` 100 each 5,00,000
Retained earnings 5,00,000
13% debentures of ` 100 each 20,00,000

The market price of equity shares is ` 50 per share. Expected dividend on equity
shares is ` 3 pershare. The dividend per share is expected to grow at the rate of 8%.
Preference shares are redeemable after eight years and the current market price is ` 80
per share. Debentures are redeemable after five years and are currently selling at ` 90 per
debenture.
The tax rate applicable to the company is
35%. CALCULATE weighted average cost of
capital using:
(i) Book value proportions
(ii) Market value proportions

September, 2022 (MTP)

(a) The capital structure of a Company is given below:

Source of capital Book Value (`)

Equity shares @ ` 100 each 24,00,000
9% Cumulative preference shares @ ` 100 each 4,00,000
11% Debentures 12,00,000
40,00,000

The company had paid equity dividend @ 25% for the last year which is likely to grow @ 5%
everyyear. The current market price of the company’s equity share is ` 200.
Considering corporate tax @ 30%, you are required to CALCULATE:
 (i) Cost of capital for each source of capital.
(ii) Weighted average cost of capital.
JANUARY, 2021 (PP)
The Capital structure of PQR Ltd. is as follows:

`
10% Debenture 3,00,000
12% Preference Shares 2,50,000
Equity Share (face value ` 10 per share) 5,00,000
10,50,000

Additional Information:

(i) ` 100 per debenture redeemable at par has 2% floatation cost & 10 years of maturity. The
market price per debenture is ` 110.
(ii) ` 100 per preference share redeemable at par has 3% floatation cost & 10 years of
maturity. The market price per preference share is ` 108.
(iii) Equity share has ` 4 floatation cost and market price per share of ` 25. The next year
expected dividend is ` 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 30%.
Required:
Calculate Weighted Average Cost of Capital (WACC) using market value weights.

JULY 2021 (PP)

Following are the information of TT Ltd.:

Particulars
Earnings per share ` 10
Dividend per share `6
Expected growth rate in Dividend 6%
Current market price per share ` 120
Tax Rate 30%
Requirement of Additional Finance ` 30 lakhs
Debt Equity Ratio (For additional finance) 2:1
Cost of Debt
0-5,00,000 10%
5,00,001 - 10,00,000 9%
Above 10,00,000 8%
Assuming that there is no Reserve and Surplus available in TT
Ltd.You are required to:

(a) Find the pattern of finance for additional requirement

(b) Calculate post tax average cost of additional debt
(c) Calculate cost of equity
(d) Calculate the overall weighted average after tax cost of additional finance.
DECEMBER, 2021 (PP)
(a) Book value of capital structure of B Ltd. is as follows:
Sources Amount
12%, 6,000 Debentures @ ` 100 each ` 6,00,000
Retained earnings ` 4,50,000
4,500 Equity shares @ ` 100 each ` 4,50,000
` 15,00,000
Currently, the market value of debenture is ` 110 per debenture and equity share is
` 180 per share. The expected rate of return to equity shareholder is 24% p.a.
Company is paying tax @ 30%.
Calculate WACC on the basis of market value weights.

MAY 2022 (PP)

A company issues:

15% convertible debentures of ` 100 each at par with a maturity period of 6 years.
On maturity, each debenture will be converted into 2 equity shares of the company.
The risk - free rate of return is 10%, market risk premium is 18% and beta of the
company is 1.25. The company has paid dividend of ` 12.76 per share. Five year
ago, it paid dividend of
` 10 per share. Flotation cost is 5% of issue amount.
5% preference shares of ` 100 each at premium of 10%. These shares are
redeemableafter 10 years at par. Flotation cost is 6% of issue amount.
Assuming corporate tax rate is 40%.

(i) Calculate the cost of convertible debentures using the approximation method.
(ii) Use YTM method to calculate cost of preference shares.
Year 1 2 3 4 5 6 7 8 9 10
PVIF 0.03, t 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744
PVIF 0.05, t 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614
PVIFA 0.03, t 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530
PVIFA 0.05, t 0.952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722

Interest rate 1% 2% 3% 4% 5% 6% 7% 8% 9%
FVIF i, 5 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.469 1.539
FVIF i, 6 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.677
FVIF i, 7 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828
December 2022 (PP)
(a) The following is the extract of the Balance Sheet of M/s KD Ltd.:
Particulars Amount
(₹)
Ordinary shares (Face Value ₹ 10/- per share) 5,00,000
Share premium 1,00,000
Retained Profits 6,00,000
8% Preference Shares (Face Value ₹ 25/- per 4,00,000
share)
12% Debentures (Face value ₹ 100/- each) 6,00,000
22,00,000
 If ex dividend 18 2

1
The ordinary shares are currently priced at ₹ 39 ex-dividend and preference
share is priced at ₹ 18 cum-dividend. The debentures are selling at 120
percent ex-interest. The applicable tax rate to D Ltd. is 30 percent. KD Ltd.’s
cost of equity has been estimated at 19 percent. Calculate the WACC
(weighted average cost of capital) of KD Ltd. on the basis of market value.

December 2022 (PP)

(b) MR Ltd. is having the following capital structure, which is considered to be
optimum as on 31.03.2022.
Equity share capital (50,000 shares) ₹ 8,00,000
12% Pref. share capital ₹ 50,000
15% Debentures ₹ 1,50,000

₹ 10,00,000
The earnings per share (EPS) of the company were ₹ 2.50 in 2021 and the expected
growth in equity dividend is 10% per year. The next year’s dividend per share (DPS)
is 50% of EPS of the year 2021. The current market price share (MPS) is ₹ 25.00. The
15% new debentures can be issued by the company. The company’s debentures are
currently selling at ₹96 per debenture. The new 12% pref. share can be sold at a net
price of ₹ 91.50(face value ₹100 each). The applicable tax rate is 30%.
You are required to calculate
(a) After tax cost of
(i) New debt,
(ii) New pref. share capital and
(iii) Equity shares assuming that new equity shares come from retained
earnings.
(b) Marginal cost of capital.
How much can be spent for capital investment before sale of new equity shares
assuming that retained earnings for next year investment. Is 50% of 2021?
 Suggested Answers
Q1. May 2020 (RTP)
Q2. November 2020 (RTP)
Q3. November 2021 (RTP)
Q4. May 2022 (RTP)
Q5. November 2022 (RTP)
March, 2018 (MTP)

March, 2018 (MTP)

August, 2018 (MTP)

April, 2019 (MTP)

October, 2020 (MTP)

March, 2021 (MTP)
April, 2021 (MTP)
April, 2021 (MTP)
November, 2021 (MTP)

April, 2022 (MTP)

September, 2022 (MTP)

JANUARY, 2021 (PP)

JULY 2021 (PP)
DECEMBER, 2021 (PP)
MAY 2022 (PP)
December 2022 (PP)
Need answer
December 2022 (PP)
Need answer