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Mini Cases: Cost of Capital Part A: Cost of Debt Mini Case 1: Cost of perpetual/Irredeemable debt Ashok Leyland issued Rs 100 Lakhs 12% debentures of Rs. 100 each. Calculate the cost of debt in each of the following cases. (Assume corporate tax rate being 40%). Case (a) If debentures are issued at par with no floatation cost. Case (b) If debentures are issued at par with 5% floatation cost. Case (c) If debentures are issued at 10% premium with 5% floatation cost. Case (d) If debentures are issued at 10% discount with 5% floatation cost.
Mini Case 2: Cost of debt redeemable [at par] in Lumpsum Ashok Leyland issued Rs 100 Lakhs 12% debentures of Rs. 100 each, redeemable at par after 5 years. Calculate the cost of debt in each of the following cases. (Assume corporate tax rate being 40%). Case (a) If debentures are issued at par with no floatation cost. Case (b) If debentures are issued at par with 5% floatation cost. Case (c) If debentures are issued at 10% premium with 5% floatation cost. Case (d) If debentures are issued at 10% discount with 5% floatation cost.
Mini Case 3: Cost of debt redeemable [at premium] in Lumpsum Ashok Leyland issued Rs 100 Lakhs 12% debentures of Rs. 100 each, redeemable at premium of 5% after 5 years. Calculate the cost of debt in each of the following cases. (Assume corporate tax rate being 40%). Case (a) If debentures are issued at par with no floatation cost. Case (b) If debentures are issued at par with 5% floatation cost. Case (c) If debentures are issued at 10% premium with 5% floatation cost. Case (d) If debentures are issued at 10% discount with 5% floatation cost.
Special Note: Cost of debt redeemable [at discount] in Lumpsum *Note that nobody will subscribe to debt which is redeemable at discount. Special Note: “Cost of debt” redeemable in Installments: We are not solving cases which deal with determining “cost of debt” redeemable in Installments in FM-1 course. Part B: Cost of Preference shares Mini Case 1: Cost of perpetual/Irredeemable Preference shares Note* Irredeemable preference shares are cannot be issued in India. Maximum duration of issue can be 20 Years.
Mini Case 2: Cost of Preference shares redeemable [at par] in Lumpsum Ashok Leyland issued Rs 100 Lakhs 12% Preference shares of Rs. 100 each, redeemable at par after 5 years. Calculate the cost of Preference shares in each of the following cases. (Dividend distribution tax being 20%). Case (a) If Preference shares are issued at par with no floatation cost. Case (b) If Preference shares are issued at par with 5% floatation cost. Case (c) If Preference shares are issued at 10% premium with 5% floatation cost.
Case (d) If Preference shares are issued at 10% discount with 5% floatation cost. Mini Case 3: Cost of Preference shares redeemable [at premium] in Lumpsum Ashok Leyland issued Rs 100 Lakhs 12% Preference shares of Rs. 100 each, redeemable at premium of 5% after 5 years. Calculate the cost of Preference shares in each of the following cases. (Dividend distribution tax being 20%). Case (a) If Preference shares are issued at par with no floatation cost. Case (b) If Preference shares are issued at par with 5% floatation cost.
Case (c) If Preference shares are issued at 10% premium with 5% floatation cost. Case (d) If Preference shares are issued at 10% discount with 5% floatation cost. Part C: Cost of Equity Capital (Including Retained Earnings) Terms useful to study different approaches as to Cost of Equity capital:1. 2. 3. 4. 5. 6. 7. What is Retention ratio? What is Price-Earnings ratio? What is the rate of return on retained earnings? What is growth rate? What is expected dividend? What is current market price? Estimating ke using Dividend growth model and CAPM.
Mini case 1: Calculation of retention ratio (Abbreviated as “b”) Calculate the Retention ratio for Dream Ltd:Case (a) Earnings per share (EPS) is Rs. 10, Dividend per share (DPS) is Rs. 6. Case (b) Dividend Payout ratio is 80% Mini case 2: Calculation of Price-Earning ratio (P/E ratio) Calculate the Price-Earning ratio (P/E ratio) in each of the following situations:Case (a) Current Market price of the share is Rs 50/- & Current Earnings per share (EPS) is Rs. 10, Dividend per share (DPS) is Rs. 6.
Case (b) Rate of return on retained earnings is 25%. Case (c) Current Market price of the share is Rs 50/- & Current Dividend per share (DPS) is Rs. 10 and dividend payout ratio is 80%. Mini case 3: Calculation of rate of return on retained earnings (“r”) Calculate the rate of return on retained earnings (“r”) in each of the following situations:Case (a) Current Market price of the share is Rs 50/- & Current Earnings per share (EPS) is Rs. 10, Dividend per share (DPS) is Rs. 6. Case (b) Price-Earning ratio (P/E ratio) is 4.
Case (c) Current Market price of the share is Rs 50/- & Current Dividend per share (DPS) is Rs. 10 and dividend payout ratio is 80%. Mini case 4: Calculation of growth rate (“g”) Calculate the growth rate (“g”) in each of the following situations:Case (a) Retention ratio (“b”) is 40%, & rate of return on retained earnings (“r”) is 20% Case (b) Dividend payout ratio is 70% & rate of return on retained earnings (“r”) is 20% Case (c) Dividend payout ratio is 80%, Price Earning ratio is 8 Case (d) Dividend payout ratio is 90%, Earnings Yield is 20%.
Mini case 5: Expected Dividend (D1) Calculate the Expected Dividend (D1) in each of the following cases:Case (a) Present Dividend per share is Rs. 10 & Growth Rate is 8% Case (b) Present Earnings per share is Rs. 10, Dividend payout ratio: 60% & Growth Rate: 8% Mini case 6: Calculation of Current Market Price (P0) Calculate the Current Market Price (P0) of an equity share in each of the following alternative cases:Case (a) Price Earning ratio is 5 & Present Earnings per share is Rs. 10. Case (b) Price Earning ratio: 5, Present Dividend per share: Rs. , Dividend payout ratio: 60% Mini case 7: Calculation of “Cost of Equity” (Ke) Calculate the “Cost of Equity” (Ke) according to (a) Dividend growth model (b) CAPM Model 1. 2. 3. 4. 5. 6. 7. Current Market Price of an equity share: Rs 100/Expected Earnings per share at the end of the year: Rs 10/Dividend Payout ratio is 80% Growth rate is 6% Rate of return on risk free investment is 8% Rate of return on market portfolio is 18%. Volatility of securities return relative to the return of a broad based market portfolio : 1. 275.