Page 328 - Corporate Finance PDF Final new link

NPP

328 Corporate Finance BRILLIANT’S

8% Debentures / 9% {S>~|Mg© ` 4,00,000
9% Preference Shares / 9% {à’$a|g eo¶g© ` 1,00,000

Equity Shares / Bp³dQ>r eo¶g© ` 5,00,000
Total / Q>moQ>b ` 10,00,000
You are required to calculate the following values:
AmnH$mo {ZåZ{b{IV ‘mZm| H$s JUZm H$aZm h¡…
(a) Assuming all asset expansion (gross expenditure for fixed assets plus related working
capital) is included in the capital budget, what is the required amount of capital budget?
‘mZm {H$ g^r AgoQ> {dñVma ({’$³ñS> AgoQ> Ho$ {bE J«m°g E³gn|{S>Ma YZ g§~§{YV d{Hª$J H¡${nQ>b) H¡${nQ>b
~OQ> ‘| gpå‘{bV h¡, H¡${nQ>b ~OQ> H$s Amdí¶H$ am{e ³¶m h¡?

(b) How much of the capital budget must be financed by external equity (that is, issue of new
equity shares) to maintain the optimal capital structure?
{H$VZm H¡${nQ>b ~OQ> AZwHy$b H¡${nQ>b ñQ´>³Ma ~ZmZo Ho$ {bE E³gQ>Z©b Bp³dQ>r (AWm©V² Z¶o Bp³dQ>r eo¶g© H$m
Bí¶y) Ûmam ’$m¶Z|g H$aZm Amdí¶H$ h¡>?
(c) Calculate the cost of: (i) new issues of equity shares and (ii) retained earnings.
{ZåZ H$s bmJV H$s JUZm H$s{OE… (i) Bp³dQ>r eo¶g© H$m Z¶m Bí¶y VWm (ii) [aQ>|S> A{Zª½g&
(d) Calculate the weighted average cost of capital using marginal weights.
‘m{O©Zb doQ²>g H$m Cn¶moJ H$aHo$ H¡${nQ>b H$s doQ>oS> EdaoO H$m°ñQ> H$s JUZm&

Solution:
Working Notes:
1. Existing cost of Debts (after tax):
K = K (1 – t) = 0.08 (1 – 0.35) = 0.08 × .65 = 0.052 or 5.2%
d i
2. Cost of Retained Earning:
K = K (1 – t) = 17 (1 – 0.35) = 11.05
r e
3. Existing WACC:
Sources Amount Ratio Cost (%) Cost of Capital
(`)
Debenture 4,00,000 40/105 5.2 1.98
Preference Share 1,00,000 10/105 9 0.86
Equity 5,00,000 50/105 17 8.10
Retained Earning 50,000 5/105 11.05 0.55
10,50,000 11.49

50
(a) Required Amount of Capital 10,50,000×  ` 5,25,000
100