1. PGDM II- FINANCIAL MANAGEMENT
PRACTICE SET- II
COST OF CAPITAL
Q1. Hyperlink ltd. Issued 10,000,10%debentures of Rs.100 each on 1/4/2011.The cost of issue
Rs.25,000.The Companys Tax rate is 35%.Determine the cost o Debentures,if they were
Issued- (a)@par, (b)@ premium of 10%, & (c)@ discount of 10%.
Q2. Hyperlink ltd. Issued 10,000,10% debentures of Rs.100 each on 1/4/2011.The cost of issue
Rs.25,000 and brokerage paid @1%.The Companys Tax rate is 35%.Determine the cost of
Debentures,if they were Issued- (a)@par, (b)@ premium of 10%, & (c)@ discount of
10%.The debentures are redeemable after 10 years @ premium of 10%.
Q3. ABC Ltd. Wants to have an issue of NCD of Rs.10 crore @ the propotion of
Rs.100/Debenture having an coupon rate of 15% p.a. and redeemable ater 8 years at a
Premium of 5%.The the expenses of subscription almost covers 3%.If the corp. tax rate is
50%,what is the cost of Debenture to the company?
Q4. MAC Corp comes out with 12% preference shares of Rs.100 crores at the proportion of
Rs100/share with maturity period of 10 years at a premium of 5%, Cost of administration
And flotation amounts 2 crores.Calculate cost o Preference Capital?
Q5. ADG ltd. Has taken a loan of Rs.10 crore from UCO bank @ interest of 11%. What is the
Cost of term loan if Tax rate is 30%?
Q6. Pankaj metals are expected to declare a dividend of Rs.5/share and the growth is expected @
10%p.a.The current market price per share is Rs.120.Calculate the cost of Equity Capital?
Q7. What is the rate of return or a company if its beta is 1.5,Risk free rate of return is 8% and the
Market rate of retutn is 18%?
Q8. A firm is currently earning Rs. 100000 and its share is selling at rhe market price of Rs. 80.
The firm has 10000 shares outstanding and no debt. The firm’s payout is assumed to be 60%
And it earns 15% return on investment. Calculate the cost of equity capital.
Q9. ABC ltd. Requires Rs.400 crores to expand its activities in the southern zone of india.The
Companys CFO is planning to get Rs.250 crores through a fresh issue of equity shares to the
general public and reserve fund for the remaining amount.The equity investors expectation
of returns are 16%. Cost of procuring equity is 4%.Calculate Ke and Kr?
Q10. JCB ltd is a large company with several thousand shareholders.An investor buys 100 shares
2. Of the company at the beginning of the year at the market price of Rs.225.The par value of
Each share is Rs.10.During the year,the company pays 25% dividend.The price of the share
At the end of the year is Rs.267.50.Calculate the total return on investment?
Q11. The capital structure of a company consists of equity shares o 50 lakhs,10% pref. shares
Of Rs.10 lakhs and 12% debentures of Rs.40 lakhs. The cost of equity capital for the
Company is 14.7% and IT rate or the Co. is 30%.Calculate WACC?
Q12.AXIS Ltd. Has paid a dividendof 40% on its share of Rs.10 in the current year.The dividend
Are growing @ 6% p.a.The cost of equity capital is 16%.The finance managers of various
Zones met to take stock of competitors growth and dividend policies and come out with the
Following suggestions to maximize the wealth of the shareholders,As the CFO of the co.you
Are require to analyze each suggestion and to recommend suitable course of action.
Alternative 1: Inc. the growth rate to 7% and lower Ke to 15%.
Alternative 2: Inc. the growth rate to 7% and Inc. Ke to 17%.
Alternative 3: Lower the growth rate to 4% and lower Ke to 15%.
Alternative 4: Lower the growth rate to 4% and Inc. Ke to 17%.
Alternative 5: Inc. the growth rate to 7% and lower Ke to 14%.
Q13. The capital structure of Hyperlink ltd. Is :-
The Market price per Equity share is Rs.32.The Company is expected to declare a
Dividend per share of Rs.2 and there will be a growth of 10% for the next 5 years. The
Preference shares are redeemable at a premium of Rs.5/share after 8 years and currently
Traded at Rs.84.Debenture redemption will take place after 7 years @ a premium of Rs.5
Per debenture and their current price is Rs.90 per unit. The Tax rate is 40%. Cal. WACC?
CAPITAL STRUCTURE RUPEES
Equity Capital (Rs.10 par value) 200
14% Preference Share Capital Rs.100 each 100
Retained Earnings 100
12% Debentures (Rs.100 each) 300
11% Term loan from IDBI 50
3. Q14. ABC Ltd. Wants to enter in to the arena of fabrication next year for which it requires Rs.20
Crores to purchase new equipments. The CFO made the following details-
The amount required will be raised in equal proportion by Debt and Equity (Consist of
new issue and retained earnings).
The company expects to earn Rs.4 crores as profit by the end of the year out of which it
pays out 50%.
The debt will be raised equally from ICICI @ 15% and Axis @ 16%.
The current market price per equity share is Rs.24 and dividend payout is Rs.2.40. Tax
rate is 50%. Calculate WACC?