Cost of Capital Numerical Questions

1. A Ltd. issues Rs. 10,00,000, 8% debentures at par. The tax rate applicable to the company is 50%. Compute the cost of debt capital.
   Answer : 4 %
2. B Ltd. issues Rs. 1,00,000, 8% debentures at a premium of 10%. The tax rate applicable to the company is 60%. Compute the cost of debt capital.
   Answer : 2.91 %
3. A Ltd. issues Rs. 1,00,000, 8% debentures at a discount of 5%. The tax rate is 60%, compute the cost of debt capital.
   Answer : 3.37 %
4. B Ltd. issues Rs. 10,00,000, 9% debentures at a premium of 10%. The costs of floatation are 2%. The tax rate applicable is 50%. Compute the cost of debt-capital.
   Answer : 4.17 %
5. A company issues Rs. 20,00,000, 10% redeemable debentures at a discount of 5%.The costs of floatation amount to Rs. 50,000. The debentures are redeemable after 8 years. Calculate before tax and after tax. Cost of debt assuring a tax rate of 55%.
   Answer : 5.11 %
6. XYZ Ltd. issues 20,000, 8% preference shares of Rs. 100 each. Cost of issue is Rs. 2 per share. Calculate cost of preference share capital if these shares are issued (a) at par, (b) at a premium of 10% and (c) of a discount of 6%.
   Answer : 8.16 % ; 7.40 % ; 8.69 %
7. ABC Ltd. issues 20,000, 8% preference shares of Rs. 100 each. Redeemable after 8 years at a premium of 10%. The cost of issue is Rs. 2 per share. Calculate the cost of preference share capital.
   Answer : 9.13 %
8. ABC Ltd. issues 20,000, 8% preference shares of Rs. 100 each at a premium of 5% redeemable after 8 years at par. The cost of issue is Rs. 2 per share. Calculate the cost of preference share capital.
   Answer : 7.51 %
9. A company issues 10,000 equity shares of Rs. 100 each at a premium of 10%. The company has been paying 25% dividend to equity shareholders for the past five years and expects to maintain the same in the future also. Compute the cost of equity capital. Will it make any difference if the market price of equity share is Rs. 175?
   Answer : 22.72% ; 14.28%
10. (a) A company plans to issue 10000 new shares of Rs. 100 each at a par. The floatation costs are expected to be 4% of the share price. The company pays a dividend of Rs. 12 per share initially and growth in dividends is expected to be 5%.Compute the cost of new issue of equity shares.
    (b) If the current market price of an equity share is Rs. 120. Calculate the cost of existing equity share capital
    Answer : 17.5% ; 15%
11. The current market price of the shares of A Ltd. is Rs. 95. The floatation costs are Rs. 5 per share amounts to Rs. 4.50 and is expected to grow at a rate of 7%. You are required to calculate the cost of equity share capital.
    Answer : 11.73%
12. A firm is considering an expenditure of Rs. 75 lakhs for expanding its operations.
    The relevant information is as follows :
    Number of existing equity shares = 10 lakhs
    Market value of existing share = Rs.100
    Net earnings = Rs.100 lakhs
    Compute the cost of existing equity share capital and of new equity capital assuming that new shares will be issued at a price of Rs. 92 per share and the costs of new issue will be Rs. 2 per share.
    Answer : 10% ; 11.11%