Page 317 - Corporate Finance PDF Final new link

NPP

BRILLIANT’S Cost of Capital 317

Solution:

D P
K =
P NP
Where, D = Preference dividend per share i.e. ` 21
P
NP = Net proceeds received after flotation expenses
i.e. ` 150 – ` 15 = ` 135

21
K = = 0.1555 or 15.55%
P 135
Illustration 4.1.11
A company raised preference share capital of ` 1,00,000 by issue of 10% preference shares of
` 10 each. Calculate the cost of preference capital when they are issued (i) 10% premium and
(ii) at 10% discount.
EH$ H§$nZr Zo ` 10 à˶oH$ Ho$ 10% {à’$a|g eo¶g© Omar H$aHo$ ` 1,00,000 H$m {à’$a|g eo¶a H¡${nQ>b àmßV
{H$¶m& {à’$a|g H¡${nQ>b H$s bmJV H$s JUZm H$s{OE O~ do Omar {H$¶o OmVo h¢& (i) 10% àr{‘¶‘ na VWm (ii) 10%
{S>ñH$mC§Q> na
Solution:

D p 10,000
(i) When preference shares are issued at 10% premium: K =   100  9.09%
p NP 1,10,000

D p 10,000
(ii) When preference shares are issued at 10% discount: K =   100 11.11%
p NP 90,000

Illustration 4.1.12
Rishi Ltd. has issued 1,000; 9% preference shares of ` 100 each at ` 95 per share. The expenses
of issue are- Underwriting 2%, Brokerage 0.5% and Printing ` 500. The company is subject to tax
rate of 50%. Find out the Cost of Capital.
F${f {b{‘Q>oS> Zo ` 100 à{V Ho$ 1,000, 9% {à’$a|g eo¶g© H$mo ` 95 à{V eo¶a na Omar {H$¶m& Bí¶y E³gn|gog
h¢… A§S>aamBqQ>J 2%, ~«moH$aoO 0.5% VWm qàqQ>J ` 500. H§$nZr 50% Q>¡³g aoQ> Ho$ AYrZ h¡& H¡${nQ>b H$s H$m°ñQ> kmV
H$s{OE&

Solution:
Expenses of Issue: (`)
Underwriting 2.00
Brokerage 0.50

 500 
Printing   0.50
 1000 
3.00