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BRILLIANT’S Cost of Capital 331

Illustration 4.1.26
The following information has been extracted from the Balance Sheet of Fashion Ltd. as on
31 Dec.: / ’¡$eZ {b{‘Q>oS> H$s ~¡b|g erQ> go 31 {Xg§~a H$mo {ZåZ{b{IV gyMZm àmßV H$s J¶r h¡…

` in lacs (` bmI ‘|)
Equity Shares Capital / Bp³dQ>r eo¶a H¡${nQ>b 400
12% Debentures / 12% {S>~|Mg© 400

18% Term Loan / 18% Q>‘© bmoZ 1,200
2,000
(a) Determine the weighted average cost of capital of the company. It has been paying divi-
dends at a consistent rate of 20% per annum.
H§$nZr Ho$ H¡${nQ>b H$s doQ>oO EdaoO H$m°ñQ> H$m {ZYm©aU H$s{OE& ¶h 20% à{V df© H$s H§${gñQ>|Q> aoQ> na
{S>{dS>|S²>g H$m ^wJVmZ H$aVr h¡&
(b) What difference will it make if the current price of the ` 100 share is ` 160?
³¶m A§Va Am¶oJm ¶{X `100 eo¶a H$m dV©‘mZ ‘yë¶ `160 h¡?

(c) Determine the effect of income tax on the cost of capital under both premises. (Tax rate 40%).
XmoZm| {à‘mBgog Ho$ A§VJ©V H¡${nQ>b H$s H$m°ñQ> na BÝH$‘ Q>¡³g Ho$ à^md H$m {ZYm©aU H$s{OE& (Q>¡³g aoQ> 40%)

Solution:
(a) Calculation of Weighted Average Cost of Capital
Sources of Capital Amount Cost of Proportion Weighted Cost
(` in Lacs) Capital of Capital
Equity Share Capital 400 20% 400/2000 4
12% Debentures 400 12% 400/2000 2.40
Term loan 1200 18% 1200/2000 10.80
2000 17.20%

The weighted average cost of capital without considering tax will be 17.20%
(b) When market price of equity shares is ` 160.
Dividend 20
K =   12.5%
e Market Price 160
Sources of Capital Amount Cost of Proportion Weighted Cost
(` in Lacs) Capital of Capital
Equity Share Capital 400 12.5% 400/2000 2.5
12% Debentures 400 12% 400/2000 2.4
18% Term loan 1200 18% 1200/2000 10.8
2000 15.7%