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BRILLIANT’S Cost of Capital 321

Change in Dividend  .12
% change in Dividend = 100 =  100 = 10%
Existing Dividend 1.20
Similarly, the change in subsequent years is also (1.45 – 1.32 = 0.13)

0.13
=  100 = 10% and so on.
1.32
Hence, the expected dividend (D ) for next year would be 1.60 + 10% of 1.60, i.e 0.16 = 1.76
1
D 1
K =  g
e P
Where, D = Current year equity dividend i.e. ` 1.76
1
P = Market price of equity share, i.e. ` 24
g = Expected growth rate in dividend i.e., 10% or 0.10
1.76
K = + 0.10 = 0.07 + 0.10 = 0.17 or 17%
e 24
Illustration 4.1.19

Assuming that the firm pays tax at a 30% rate, compute the after tax cost of capital in the
following cases:
(a) A 12.5% preference share sold at par.
(b) A perpetual bond sold at par, coupon rate being 11.5%
(c) A ten year 6%, ` 900 per bond sold at ` 650.
(d) A common share selling at a market price of ` 90 and paying a current dividend of ` 7 per
share which is expected to grow at a rate of 6%.
‘mZm {H$ g§ñWm 30% Xa na Q>¡³g H$m ^wJVmZ H$aVr h¡, {ZåZ{b{IV pñW{V¶m| ‘| H¡${nQ>b H$s H$m°ñQ> H$s Q>¡³g Ho$
níMmV² JUZm H$s{OE…
(a) EQ> nma ~oMo J¶o 12.5% {à’$a|g eo¶a&
(b) EQ> nma ~oMo J¶o nno©MwAb ~m§S>, Hy$nZ aoQ> 11.5% h¡&
(c) ` 650 na ~oMo J¶o Xg df© 6%> ` 900> à{V ~m§S>&
(d) ` 90 Ho$ ~mOma ‘yë¶ na ~oMm J¶m EH$ H$m°‘Z eo¶a VWm ` 27 à{V eo¶a Ho$ H$a§Q> {S>{dS>|S> H$m ^wJVmZ {H$¶m
OmVm h¡ Omo 6% H$s Xa na ~‹T>Zo H$s Anojm h¡&
Solution:
(a) 12.5% preference shares sold at par
Dividend 12.5
Cost of Preference Shares = =  100 = 12.5%
Net Price 100
(b) Perpetual bond sold at par, coupon rate 11.5%
Cost of capital = Interest (1-tax rate)
= 11.5% (1 – 0.30) = 8.05%