Types of Debt

Loan
Debenture - Redeemable or Irredeema

Cost of Loan - Interest Cost

Bond or Debenture

Yield to Maturity Approach

Short cut formula

Cost of Redeemabale Debenture or Bond

Example

A company issued 15,000, 12% debentures

The debentures will be redeemed at matur

Given

Face value 150

Premium 8%
Issue Price NP 162.00
Redemption value 150
Maturity 5
Coupon Rate annual 12%
Tax Rate 30%

Problem:
A company issued 20,000, 10% debentures
The debentures will be redeemed at maturi
Face value 200
Premium 5%
Issue Price NP 210.00
Redemption value 200
Maturity 5
Coupon Rate annual 10%
Tax Rate 25%
Flolation Cost 3%
Floation Cost 6.3

To clarify:
Flotation cost is always calculated on t

Cost of Debenture or Bond (Redeemable) us

Problem:
A company, XYZ Ltd., has issued 10,000 de
The company has a credit rating of BBB. Th
the risk premium associated with the comp
Compute the cost of debt (Kd) using the Ris
Given Data:
Face Value of Debenture: Rs. 500
Coupon Rate: 8%
Risk-Free Rate: 5% (based on governmen
Risk Premium for BBB Rating: 3%
Years to Maturity (n): 5
Coupon Payment (I): Rs. 500 × 8% = Rs.

Approach:
The cost of debt (Kd) can be calculated u
Kd=Risk-Free Rate+Risk Premium
Substitute the given values:
Kd=5%+3%=8%
So, the cost of debt is 8%. (Pre Tax)
If tax is 30%
Post Tax cost of debenture
e or Irredeemable

nture or Bond
12% debentures of Rs. 150 each at a premium of 8% on
eemed at maturity. Compute the cost of debentures ass

Coupon Amt 18
Redemption value 150
NP 162.00
NP 5

Cost of debt Kd
Numerator 10.2
Denominator 156
Kd 6.54%

10% debentures of Rs. 200 each at a premium of 5% on

eemed at maturity. The flotation cost incurred by the com
 Coupon Amt 20
Redemption value 200
NP 203.70
Maturity 5

Cost of debt Kd
Numerator 14.26
Denominator 201.85
Kd 7.06%

calculated on the issue price because that represe

(Redeemable) using Risk Premium Approach

ssued 10,000 debentures with a face value of Rs. 500 ea

rating of BBB. The risk-free rate (based on government b
d with the company’s BBB credit rating is 3%. The deben
Kd) using the Risk-Free Rate and Risk Premium.
e: Rs. 500

d on government bonds) (T Bill Rate or Treasury Bon

ating: 3%

500 × 8% = Rs. 40 per annum

n be calculated using the following formula:

emium

. (Pre Tax)

5.600%
emium of 8% on 1.5.2018, with maturity on 1.5.2023.
f debentures assuming the tax rate is 30%.

0 -162.00
1 12.6
2 12.6
3 12.6
4 12.6
5 162.6
6.48%

emium of 5% on 1.6.2020, with maturity on 1.6.2025.

curred by the company is 3% of the issue price. Comput
se that represents the actual amount the compan

roach

lue of Rs. 500 each, carrying a coupon rate of 8% per an

on government bonds) is 5%, and
is 3%. The debentures are to be redeemed at face value
remium.
r Treasury Bond Yield )
y on 1.5.2023.

y on 1.6.2025.
ue price. Compute the cost of debentures assuming the
unt the company receives from the issuance, exclu

rate of 8% per annum.

med at face value on maturity in 5 years.

uming the tax rate is 25%.
nce, excluding any costs.
Problem:

A company issued 5,000, 10% redeemable

and the shares will be redeemed after 5 yea
The net proceeds from the issue of prefere
Compute the cost of redeemable prefere

Given Data:

Annual Preference Dividend (PD):

Redemption Value (RV):
Net Proceeds on Issue of Preference Sh
Life of Preference Shares (n):

Kp 7.619%
Problem:

A company has issued 12% redeemable pre

The shares are redeemable at the end of 8
Calculate the effective cost of preferenc

Given Data:

Coupon Rate = (The annual preference div

Face Value of Preference Share = Rs.
Flotation Cost (underwriting expenses)
Redemption Period = 8
Net Proceeds after Flotation Costs (NP

Solution

Floatation cost 6
Issue price 200
Net Proceeds 194
Redemption value 200
Pref Dividend 24
N 8
Numerator 24.75
Denominator 197
Cost of Pref Shares Kp 12.56%

Solve this Yourselves

Problem:
A company has issued 8% redeemable pref
The shares were issued at a price of Rs. 95
Calculate the cost of redeemable preferenc
% redeemable preference shares of Rs. 100 each. The sh
med after 5 years. The company pays an annual prefere
ssue of preference shares are Rs. 110 per share.
mable preference shares (K) using the given formula

nd (PD): 10
100
Preference Shares (NP): Rs. 110
(n): 5

Numerator 8
Denominator 105
Kp 7.619%
redeemable preference shares with a face value of Rs. 2
at the end of 8 years from the date of issue. The underw
t of preference share capital, taking flotation costs in

l preference dividend) 12%

Share = Rs. 200
ing expenses) = of the issue price 3%
Yrs
ion Costs (NP) = (Issue Price - Flotation Cost)
 deemable preference shares with a face value of Rs. 10
price of Rs. 95 per share. The annual preference dividen
mable preference shares using the given formula, accoun
. 100 each. The shares were issued at a premium of 10%
an annual preference dividend of Rs. 10 per share.
per share.
the given formula.
ace value of Rs. 200 each.
ssue. The underwriting expenses are expected to be 3%.
flotation costs into account.

on Cost)
ce value of Rs. 100 each, redeemable at the end of 6 yea
reference dividend is Rs. 8 per share. The flotation cost
n formula, accounting for flotation costs.
ium of 10% on 1st January 2021,
hare.
d to be 3%.
nd of 6 years.
ation cost incurred in issuing the preference shares is 2%
shares is 2% of the issue price.
Problem:
A company issues irredeemable preference
Calculate the cost of irredeemable prefe

Given
Face value 100
pref Dividend 10%
Pref dividend amount 10

Problem:

If GreenTech Ltd. is issuing preferred stock

and a flotation cost of 5%, then what is the

Given
Issue Price of Pref shares
Dividend
Floatation cost
Net proceeds

Kp

Cost of Irredeemable Debenture

A company has issued 10% irredeemable d

Calculate the cost of irredeemable debe

Given

Face value 1000

Coupon rate 10%
N Infinitive
Market price or NP 950
Tax 30%

Coupon Amt 100

Kd 0.10526
Kd *(1-tax) 7.368%
mable preference shares with a face value of Rs. 100 eac
deemable preference shares.

market price 120

Cost of Irremeemable pref shares

g preferred stock at Rs. 150 per share, with a stated divi

then what is the cost of preference share?

150
18
5%
 142.5

12.63%

ebenture

% irredeemable debentures with a face value of Rs. 1,00

deemable debenture if tax is 30%

nitive
lue of Rs. 100 each and a dividend rate of 10%. The mar

ef shares 8.333%

with a stated dividend of Rs. 18,

value of Rs. 1,000 each. The market price of the debent
of 10%. The market price of the preference shares is Rs
ice of the debenture is Rs. 950.
shares is Rs. 120.
Problem:
XYZ Ltd. is planning to raise equity capital.
The risk-free rate (rate on government bon
Calculate the cost of equity using the Cap

Given

Risk free rate 6%

Market Returns 12%
Beta 1.2

Ke 13.200%

Problem 2:
Company XYZ Ltd. has a beta (β) of 0.8.

Beta 0.8
MRP 6%
RFR 5%
Ke 9.800%

Problem 3:

Company ABC Ltd. has a beta (β) of 1.3.

equity capital. The company’s stock has a beta (β) of 1
overnment bonds) is 6%, and the expected market retur
y using the Capital Asset Pricing Model (CAPM).

What is market risk Premium ?

Market returns- Risk free rate

eta (β) of 0.8. The risk-free rate is 5%, and the marke
eta (β) of 1.3. The risk-free rate is 4.5%, and the mar
ta (β) of 1.2.
arket return is 12%.
APM).

emium ?
ree rate

the market risk premium is 6%. Calculate the cost o

nd the market risk premium is 8%. Calculate the cost
the cost of equity using the CAPM model.
e the cost of equity using the CAPM model.
 #VALUE

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#NAME?

2/21/2024
2/21/2025

1469.1 21.81%
1481.675 0.852%
1493.175 0.773%
1487.175 -0.403%
1485.2 -0.133%
1454.5 -2.089%
1462.375 0.540%
1493 2.073%
1490.425 -0.173%
1505.8 1.026%
1499.15 -0.443%
1502.975 0.255%
1479.05 -1.605%
1465.6 -0.914%
1475.1 0.646%
1432.35 -2.941%
1432.625 0.019%
1418.625 -0.982%
1439.175 1.438%
1425.375 -0.964%
1443.4 1.257%
1450.65 0.501%
1454.95 0.296%
1442.075 -0.889%
1493.925 3.532%
1488.4 -0.371%
1484.75 -0.246%
1485.65 0.061%
1471.2 -0.977%
1463.225 -0.544%
1459.975 -0.222%
1485.5 1.733%
1463.55 -1.489%
1479.3 1.070%
1467.55 -0.797%
1466.45 -0.075%
1467.225 0.053%
1464.075 -0.215%
1470.8 0.458%
1480.3 0.644%
1459.25 -1.432%
1450.3 -0.615%
 1459.2 0.612%
1451.5 -0.529%
1465.25 0.943%
1465.575 0.022%
1466.05 0.032%
1434.25 -2.193%
1419.5 -1.034%
1401.975 -1.242%
1418.475 1.170%
1393.4 -1.784%
1407.575 1.012%
1402.65 -0.351%
1419.9 1.222%
1415.575 -0.305%
1425.1 0.671%
1435.35 0.717%
1434.525 -0.057%
1435.65 0.078%
1460.375 1.708%
1486.6 1.780%
1479.9 -0.452%
1466.225 -0.928%
1455.625 -0.726%
1440.725 -1.029%
 1425 -1.097%
1429.8 0.336%
1510.625 5.499%
1396.8 -7.834%
1421.075 1.723%
1431.875 0.757%
1469.725 2.609%
1470.3 0.039%
1456.75 -0.926%
1463.025 0.430%
1464.325 0.089%
1477.275 0.880%
1480.7 0.232%
1458.6 -1.504%
1473.2 0.996%
1453.4 -1.353%
1441.5 -0.822%
1454.25 0.881%
1513.7 4.007%
1530.55 1.107%
1565.925 2.285%
1560.175 -0.368%
1566.15 0.382%
1552.65 -0.866%
 1553.95 0.084%
1590.025 2.295%
1601.05 0.691%
1590.075 -0.688%
1583.45 -0.418%
1581.75 -0.107%
1596.725 0.942%
1596.85 0.008%
1575.725 -1.332%
1585.175 0.598%
1554.75 -1.938%
1500.55 -3.548%
1487.825 -0.852%
1495.325 0.503%
1491.3 -0.270%
1508.925 1.175%
1520.375 0.756%
1512.775 -0.501%
1505.125 -0.507%
1515.85 0.710%
1499.225 -1.103%
1447.35 -3.521%
1455.9 0.589%
1464.6 0.596%
 1447.75 -1.157%
1474.15 1.807%
1460.75 -0.913%
1463.45 0.185%
1461.325 -0.145%
1478.075 1.140%
1488.6 0.710%
1496.675 0.541%
1498.275 0.107%
1497.55 -0.048%
1499.975 0.162%
1512.075 0.803%
1500.225 -0.787%
1497.875 -0.157%
1520.425 1.494%
1509.875 -0.696%
1516.4 0.431%
1509.8 -0.436%
1514.9 0.337%
1493.575 -1.418%
1464.925 -1.937%
1463.025 -0.130%
1461.5 -0.104%
1451.55 -0.683%
 1479.2 1.887%
1472.225 -0.473%
1471.45 -0.053%
1472.3 0.058%
1463.125 -0.625%
1469.675 0.447%
1486.55 1.142%
1494.2 0.513%
1489.625 -0.307%
1493.725 0.275%
1500.35 0.443%
1526.2 1.708%
1476.9 -3.284%
1464.9 -0.816%
1407.625 -3.988%
1386.9 -1.483%
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1356.725 0.201%
1358.775 0.151%
1369.125 0.759%
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1287.8 1.711%
1295.55 0.600%
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1292.45 1.646%
1309.05 1.276%
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1263.85 -1.121%
1273.35 0.749%
1268.05 -0.417%
1245.1 -1.826%
1253.05 0.636%
1230.6 -1.808%
1206 -2.019%
1222.1 1.326%
1223.5 0.114%
1216.6 -0.566%
1220.95 0.357%
1210.9 -0.827%
1215.45 0.375%
1221.65 0.509%
1241.65 1.624%
1251.35 0.778%
1218.2 -2.685%
1240.9 1.846%
1264.7 1.900%
1255 -0.770%
1242.35 -1.013%
1240.05 -0.185%
1238.55 -0.121%
1252.3 1.104%
1268.7 1.301%
1301.3 2.537%
1305 0.284%
1272.95 -2.487%
1277.3 0.341%
1263.85 -1.059%
1245.9 -1.430%
1229.3 -1.341%
1233.8 0.365%
1235.8 0.162%
 1253.6 1.430%
1264.9 0.897%
1264.65 -0.020%
1245.15 -1.554%
1286 3.228%
1278.05 -0.620%
1281.55 0.273%
1266.85 -1.154%
1253.4 -1.067%
1234.6 -1.511%
1215.7 -1.543%
1216.2 0.041%
1216.95 0.062%
1224.75 0.639%
1224.95 0.016%
1226.95 0.163%
1233.05 0.496%
1227.7
Problem:

Company ABC Ltd. is expected to pay a d

The dividend is expected to grow at a const
Calculate the cost of equity using the Div

Givern
D1
g
CMP

Ke

•Cost of Equity (Ke )= [D1 /(P0 –F)]+ g

•D1 = [D0 (1+ g)] i.e. next expected divid
•P0 = Current Market price per share
•g = Constant Growth Rate of Dividend
• F = Flotation cost per share.

Problem:

Company ABC Ltd. is issuing new

The dividends are expected to grow
Calculate the cost of equity using

D0
g
D1
CMP
Floatation cost

Ke
 td. is expected to pay a dividend of Rs. 15 per share nex
xpected to grow at a constant rate of 6% per annum. The
t of equity using the Dividend Growth Approach.

15
6%
250

12.00%

y (Ke )= [D1 /(P0 –F)]+ g

)] i.e. next expected dividend
Market price per share
Growth Rate of Dividend
cost per share.

ABC Ltd. is issuing new equity shares. The expected d

nds are expected to grow at a constant rate of 6% per a
the cost of equity using the Dividend Growth Appro

10
6%
10.6
150
5

13.310344827586200%
5 per share next year (D1).
per annum. The current market price of the company’s e
Approach.
The expected dividend for the current year (D0) is Rs. 10
ate of 6% per annum. The current market price of the sh
Growth Approach with flotation costs.
ompany’s equity shares is Rs. 250.
0) is Rs. 10.
ce of the shares is Rs. 150. However, the flotation cost p
ation cost per share is Rs. 5.
Problem:

Company PQR Ltd. is currently earning Rs

The company expects its earnings to grow a
Calculate the cost of equity using the Ear

Earnings per Share (EPS) = Rs.

Payout Ratio =
Growth Rate = 8% (or 0.08)
Market Price per Share = Rs.

Retained Earnings (b)

Growth rate
Market Price

Ke
Problem:

Company XYZ Ltd. has a net profit of Rs

The current earnings per share (EPS) is Rs.
Calculate cost of equity

Net Profit 5,000,000

Market Cap 250,000,000
EPS 5
MPS 250
Ke 0.0200

Problem:

Company ABC Ltd. has a retention ratio

The company expects its dividends to grow
Calculate the cost of equity using the Div

•This model takes Earnings retention ra

•Growth (g) = b × r
•Where,
 • r = rate of return on fund invested
• b = earnings retention ratio/ rate*
•*Proportion of earnings available to eq

Problem:

Company ABC Ltd. has a retention ratio

The company expects its dividends to grow
Calculate the cost of equity using the Div

Given
Retention Ratio
Rate of return
D0
CMP

Using DDM
D1

Ke
urrently earning Rs. 50 per share and has a dividend pa
earnings to grow at a constant rate of 8% per annum. T
uity using the Earnings Approach.

PS) = Rs. 50
60%
8%
e = Rs. 400

20
8%
400

13.400%
 a net profit of Rs. 50,00,000. The market capitalizat
r share (EPS) is Rs. 5, and the market share price is Rs. 2

0.02

a retention ratio (b) of 60% and a rate of return on

dividends to grow at a constant rate. The current divide
uity using the Dividend Discount Model (DDM) or Ea

rnings retention rate (b) and rate of return on investme

n fund invested
on ratio/ rate*
ngs available to equity shareholders which is not distri

a retention ratio (b) of 60% and a rate of return on

dividends to grow at a constant rate. The current divide
uity using the Dividend Discount Model (DDM)

60% growth rate is not given

12% g=b * r
8 g= retention ratio * expected r
100 7.200%

8.576

15.77600%
vidend payout ratio of 60%.
r annum. The market price of the company’s equity shar
apitalization of the company is Rs. 25,00,00,000.
rice is Rs. 250.

return on investment (r) of 12%.

rent dividend paid is Rs. 8 per share. The market price o
DDM) or Earnings Approach.

n investments (r) into account to estimate the future gr

 not distributed as dividend

return on investment (r) of 12%.

rent dividend paid is Rs. 8 per share. The market price o
DDM)

expected rate of return

equity shares is Rs. 400.
,000.

rket price of the stock is Rs. 100.

e future growth rate. It can be calculated as below:

rket price of the stock is Rs. 100.
below:
Problem:
Company XYZ Ltd. has the followi

Equity:
Market Value: Rs. 10,00,000
Book Value: Rs. 8,00,000
Cost of Equity (Ke): 12%
Debt:
Market Value: Rs. 5,00,000
Book Value: Rs. 4,50,000
Cost of Debt (Kd): 8%
Tax Rate (Tc): 30%

Calculate the WACC using both mar

Given
Tax 30%
Capital market valuCost
Equity 1,000,000 12.00%
Debt 500,000 8.00%
1,500,000
Given
Tax 30%
Capital Book value Cost
Equity 800,000 12.00%
Debt 450,000 8.00%
1,250,000
s the following financial information:

00,000

0,000

ng both market value and book value weights.

Weight Post Tax W * K

0.66667 12.00% 0.08
0.33333 5.600% 0.01867
WACC 9.87%
Weight Post Tax W * K
0.64 12.00% 0.0768
0.36 5.600% 0.02016
WACC 9.70%