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Placement Cell

CONGRATULATIONS TO ALL 53 STUDENTS SELECTED IN HERE Solutions ON 16TH FEBRUARY, 2016

Our Mission

Excellence is not the final destination, it is an ongoing journey of evolution powered by intellectual energies and guided forward by the moral value orientation.

WELCOME TO MODEL COLLEGE

ADMISSIONS OPEN FOR:

• BANKING & INSURANCE

• FINANCIAL MARKET

• B.Sc.COMPUTER SCIENCE

• B.Sc. MICRO BIOLOGY & LIFE SCIENCE


CONTACT - PRINCIPAL

(--06.08.16)
M.Com II F.M. Notes
COST OF CAPITAL
 
Q.1. The total capital employed by Enam Ltd. is Rs.60,00,000.  The proportion is as under Debt 30%; Preference Share Capital 10%; The Equity Capital and retained earnings are Proportion of 3:1.  All have face value of Rs.100.  The debt carries interest @ 15% and preference capital carries dividend @ 12%.  Equity Holders expect dividend @ 15%.  Tax rate is @ 40%.  Ascertain the composite cost of capital.                                                                      (October 1997)
 
Q.2. M/s ABC Ltd. provides you the following specific cost of capital along with the indicated Book and Market value weights:                         WEIGHTS
Capital Type Cost Book Value Market Value
Equity Shares
15% Preference
14% Debentures
18%
?
?
0.5
0.2
0.3
0.58
0.17
0.25
    1 1
  1. Calculate the weighted cost of capital using Book and Market Value weights.
  2. Calculate the weighted average cost of capital using marginal weights, if the company intended to raise the needed funds using 50% “Long – term Debt” 15% through “Equity Shares & retained Earnings” & Balance by way of Preference Shares”.                                
                                     (October 1998 & May 2000)
 
Q.3. A Ltd. Share is quoted in the market at Rs.20 currently. The company paid a dividend of Rs.2 per share and the investors expect a growth rate of 5 per cent per year.  Compute the company’s (a) Equity Cost of Capital (b) If the anticipated growth rate is 8%.  What would be the indicated market price of the share (c) If the company’s cost of capital is 12% and the anticipated growth rate is 5% p.a. what would be the indicated market price if the dividend of Rs.2 per share is to be maintained.                                                                      (October 2001)
 
Q.4. B Ltd. has the following capital structure: Equity Shares Rs.60 Lakhs; 12% Preference Shares Rs.10 Lakhs; 14% Debentures Rs.30 Lakhs. The market price of the company’s share is Rs.20.  It is expected that the company will pay next year a dividend of Rs.2 per share which will grow at 8 per cent for ever.  Assume 40% tax rate.  You are required to: (a) Compute weighted average cost of capital based on existing capital structure. (b) Compute the new weighted average cost of capital if the company raises an additional Rs.20 Lakhs debt by issuing 15% debentures. This would result in increasing the expected dividend to Rs.3 per share & leave the growth rate unchanged but the price of the share will fall to Rs.16.                           (May 2002)
 
Q.5. From the following capital structure of a Ltd. Company you are required to calculate overall cost of capital using:
(a) Book value weights
(b) Market value weights
Source Book Value (Rs.) Market Value (Rs.)
Equity Share Capital (Rs.10 per share)
Retained earnings
Preference Share Capital
Debentures
45,000
15,000
10,000
30,000
90,000
--
10,000
30,000
The after tax cost of different sources is as follows:
Equity Share Capital               14%                 Retained Earnings                  13%
Preference Share Capital       10%                 Debentures                             5%                              
                                              (October 2002)
Q.6. A company has various alternatives of capital debt mix and cost thereof as under:
Debt as % of Total Capital Cost of Debt % Cost of Equity %
0
10
20
30
40
50
60
70
80
90
100
5.0
5.0
5.0
5.50
5.50
6.00
6.00
7.00
7.00
7.50
7.50
12.00
12.00
12.50
13.00
13.00
13.50
14.00
14.50
15.00
15.00
15.00

Suggest optimal debt equity mix. A company has cost of debt at 6% and cost of equity is 14%.  The Debt Equity proportion is 3%.  Calculate weighted average cost of capital.        (May 1997)      
 
Q.7. Three companies A, B and C are in the same type of business and hence have similar operating risks.  However, the capital structure of each of them is different and following are the details:
Particulars A B C
Equity Shares Capital
(Face value Rs.10)
Market Value per share
Dividend per share
Debentures (Face value Rs.100)
Market value per debentures
Interest rate
4,00,000
15
2.70
NIL
--
--
2,50,000
20
4
1,00,000
125
10%
5,00,000
12
2.88
2,50,000
80
8%
 
Assume that the current levels of dividend are generally expected to continue indefinitely and tax rate is 50%.
Prepare weighted average cost of capital of each company.                                      (April 2003)
 
Q.8. The capital structure of Alpha Co. Ltd. Comprising 12% debentures, 9% Preference Shares and equity shares of Rs.100 each is in the ratio of 3:2:5.
            The company is contemplating introduction of further capital to meet the expansion needs by seeking 14% term loan from financial institution.  As a result of this proposal the proportion of debentures, preference shares and equity shares would get reduced by 1/10, 1/15, and 1/6, respectively.  In the light of above proposal, calculate the impact on weighted average cost of capital, assuming 35% tax rate expected dividend Rs.9 per share at the end of the year, the growth rate of equity dividend at 5%.  No change in the dividend, dividend growth rate and market price of share is expected after availing the proposed term loan.                    (April 2005)
 
Q.9. BIG BANG MARKETING LTD. is currently quoted at Rs.35.  Next year the company would pay dividend of Rs.3.5 per share of Rs.10.  The investor expects a growth rate of 5% p.a. Compute:
(a) Company’s cost of Equity Capital
(b) If the anticipated growth rate is 6% p.a. what would be the indicated market price of the share if the dividend of Rs.4 per share is to be declared a the same cost of equity capital.
(October 2005)
 
 
Q.10. Law and Order Ltd. Has the following capital structure:
                                                            Rs. in lacs
            Equity shares                          25
            6% A Preference shares        35
            7% Debentures                       30
            Total                                        90
            The market price of the company’s equity share is Rs.30/-.  It is expected that the company would next year pay a dividend of Rs.3 per share on the face value of Rs.10.  The company’s growth prospects are 4% per annum.
Assume corporate taxation @ 35% you are required to:
  1. Compute weighted average cost of capital based on the existing capital structure.
  2. Compute the new weighted average cost of capital if the company raised additional capital of Rs.40 lacs as under:
Rs. in lacs
            Equity shares                          10
            6% A Preference shares        15
            9% Debentures                       15
            Total                                        40
            This would result in increasing the expected dividend to Rs.4.50 per equity share and leave the growth rate unchanged at 4% but the anticipated market price of the equity shares would fall to Rs.25.