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322 Corporate Finance BRILLIANT’S

(c) 10 year 6% ` 900 per bond sold at ` 650

I (FV NP) 
n
Cost of debt (before tax) = FV NP  100
2
where, I = Interest Amount = 6% of 900 = 54 FV = Face Value = 900,
NP = Net Proceed = 650, n = No. of years = 10

900 650
54 
10 79
Cost of Debt (K ) =  100 =  100 = 10.19%
d 900 650 775
2
Cost of debt (K ) after tax = Cost of debt (K ) before tax × (1 – tax rate)
d d
= 10.19% (1–0.30) = 7.13%
(d) Given, Market price (P ) = ` 90, Current dividend (D ) = 7,
0 o
Growth rate = 6%, Cost of equity = ?
D 1
Cost of equity (K ) = + growth rate
e Market Price
where,
D = D + Growth Rate, = 7 + (6% of 7) = 7.42
1 o
7.42
K =  0.06 = 14.24%
e 90
Cost of equity = 14.24%

WEIGHTED AVERAGE COST OF CAPITAL (WACC)
H¡${nQ>b H$s doQ>oS> EdaoO H$m°ñQ> (WACC)

Illustration 4.1.20
XYZ Ltd. has obtained capital from the following sources, the specific costs are also noted
down against them:
XYZ {b{‘Q>oS> Zo {ZåZ{b{IV òmoVm| go H¡${nQ>b àmßV {H$¶m h¡, {d{eï> bmJV| ^r CZHo$ gm‘Zo {bIr J¶r h¢…
Sources of Capital Book Value Market Value Cost of Capital
(H¡${nQ>b H$s gmog}g) (~wH$ d¡ë¶y) (‘mH}$Q> d¡ë¶y) (H¡${nQ>b H$s H$m°ñQ>)
(`) (`)

Debentures / {S>~oÝMg© 4,00,000 3,80,000 5%
Preference Shares / {à’$aoÝg eo¶g© 1,00,000 1,10,000 8%