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                  312                               Corporate Finance                      BRILLIANT’S


                  expected  dividend  of  the  firm  in  order  to  na ‘mH}$Q> àmBg {ZYm©[aV H$aZo Ho$ {bE ’$‘© Ho$ Ano{jV
                  determine the market price of an ownership  {S>{dS>oÝS> {S>ñH$mC§Q> {H$¶m OmVm h¡& Bp³dQ>r Ho$ Z¶o Bí¶y
                  interest in the firm. The cost of new issues of
                                                              H$s H$m°ñQ> H$mo AmgmZr go kmV H$aZo Ho$ {bE âbmoQ>oeZ
                  equity can easily be calculated by determining
                  the percentage reduction in the current market  H$m°ñQ> ({Og‘| A§S>a àmBqgJ VWm A§S>aamBqQ>J ’$sg em{‘b
                  price  attributable  to  flotation  cost,  which  h¡) Ho$ {bE E[Q´ã¶yQ>o~b H$a§Q> ‘mH}$Q> àmBg ‘| ng}ÝQ>oO
                  consists of underpricing and underwriting fees.  [aS>³eZ H$m {ZYm©aU {H$¶m OmVm h¡& ¶{X h‘ ¶h EÁ¶y‘
                  If we assume that F represent the percentage  H$aVo h¡ {H$ F Z¶o Bp³dQ>r Bí¶y na A§S>aàmBqgJ VWm
                  reduction in the current market price expected
                                                              A§S>aamBqQ>J MmO}g Ho$ n[aUm‘ñdê$n Ano{jV H$a§Q> ‘mH}$Q>
                  as a result of underpricing and underwriting
                  charges on a new equity–issue, the cost of the  àmBg ‘| nagoÝQ>oO [aS>³eZ h¡, V~ Z¶o Bp³dQ>r Bí¶y H$s
                  new equity issue, K can be expressed as follows:  H$m°ñQ> K H$mo {ZåZ{b{IV àH$ma go Xem©¶m Om gH$Vm h¡:

                                                            D 1
                                                      K           g
                                                       r
                                                          P 0  1 F 
                                                              
                      Here, F is the percentage cost of selling the  ¶hm§, F Bí¶y H$mo gob H$aZo H$s nagoÝQ>oO H$m°ñQ h¡,
                  issue, so P (1– F) = P is the net price received by  AV: P (1– F) = P ’$‘© Ûmam àmßV ZoQ> àmBg h¡&
                  the firm.
                   Illustration 4.1.3
                      The market price of Arvind Products equity share is ` 285 per share and the flotation cost is
                  ` 5 per share. If the dividend is ` 35 and has been growing at an annual rate of 18%. Determine the
                  cost of equity capital.
                      AaqdX àmoS>³Q²>g Bp³dQ>r eo¶a H$m ~mOma ‘yë¶ `  285 à{V eo¶a h¡ VWm âbmoQ>oeZ H$m°ñQ> `  4 à{V eo¶a h¡& ¶{X
                  {S>{dS>|S> `  35 h¡ VWm 18% dm{f©H$ Xa go ~‹T> ahm h¡& Bp³dQ>r H¡${nQ>b H$s bmJV H$m {ZYm©aU H$s{OE&
                  Solution:
                      The cost of equity share is determined as follows:

                                               35           35
                                        K           0.18      0.18  = 0.125 + 0.18 = 0.305
                                          e
                                             285 5        280
                      The cost equity is 30.5%.
                                                                                                     

                                       WEIGHTED AVERAGE COST OF CAPITAL
                                               H¡${nQ>b H$r doQ>oS> EdaoO H$m°ñQ>

                   Q.32. Write a short note on weighted average cost of capital.
                         H¡${nQ>b H$s doQ>oS> EdaoO H$m°ñQ> na g§{jßV {Q>ßnUr {b{IE&
                                                           OR
                         What are the limitations of weighted average cost of capital?
                         H¡${nQ>b H$s doQ>oS> EdaoO H$m°ñQ> H$s gr‘mE± ³¶m h¢?
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