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Cost of Capital - Practice Session

The document discusses the cost of capital, detailing various components such as the cost of debt, preference share capital, equity, and the weighted average cost of capital (WACC). It provides examples and calculations for two companies, PQR Ltd. and Kaloo Ltd., including their capital structures and required financial metrics. The document emphasizes the importance of understanding these costs for effective financial management.

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238 views16 pages

Cost of Capital - Practice Session

The document discusses the cost of capital, detailing various components such as the cost of debt, preference share capital, equity, and the weighted average cost of capital (WACC). It provides examples and calculations for two companies, PQR Ltd. and Kaloo Ltd., including their capital structures and required financial metrics. The document emphasizes the importance of understanding these costs for effective financial management.

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COST OF CAPITAL

CHAPTER

4 COST OF CAPITAL
Concept #1 Cost of Debt (KD)

21
FINANCIAL MANAGEMENT
By GOURAV KABRA

Concept #2 Cost of Preference Share Capital (KP)

Concept #3 Cost of Equity (KE) & Cost of Retained Earnings (KS)

22
COST OF CAPITAL

Concept #4 Cost of Capital – WACC/MACC (KO/KC)

Question #1 PTP J24/ D24/ D23 Ans: 13.928%; 14.593%

PQR Ltd., has the following book value capital structure:

Particulars ₹ in crore
Equity capital (₹ 10 each fully paid) 15.00
11% Preference capital (₹ 100 each fully paid) 1.00
Retained earnings 20.00
13.5% Debentures (₹ 100 each) 10.00
15% Term loans 12.50

Additional Information:
(i) Expected equity dividend per share is ₹ 3.60. The dividend per share is
expected to grow at the rate of 7 per cent. The market price per share is ₹
40.
(ii) 11% Preference shares are redeemable after ten years at par. The current
market price is ₹ 75 per share.
(iii) 13.5% Debentures are redeemable after six years at par. Current market
price is ₹ 80 per debenture. Only interest is tax deductible.
(iv) The income-tax rate for the company is 40 per cent.

You are required to calculate the weighted average cost of capital using (i) Book
value weights; and (ii) Market value weights.

Question #2 PTP J23/D22/D19 Ans: 16.899%

Kaloo Ltd. requires additional finance of ₹ 20 lakhs for meeting its investment plans.
The company has ₹ 4,00,000 in the form of retained earnings available for investment
purposes. Target Debt-Equity Ratio 25:75. Cost of debt is 10% (before tax) for the first ₹

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A
BR
KA
AV
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GO

7596941141 GOURAV
WHATSAPP | CALL KABRA
A
BR
KA
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GO

7596941141 GOURAV
WHATSAPP | CALL KABRA
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BR
KA
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GO

7596941141 GOURAV
WHATSAPP | CALL KABRA
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BR
KA
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GO

7596941141 GOURAV
WHATSAPP | CALL KABRA
A
BR
KA
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7596941141 GOURAV
WHATSAPP | CALL KABRA
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KA
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7596941141 GOURAV
WHATSAPP | CALL KABRA
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KA
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7596941141 GOURAV
WHATSAPP | CALL KABRA
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KA
AV
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GO

7596941141 GOURAV
WHATSAPP | CALL KABRA

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