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332 Corporate Finance BRILLIANT’S

If the market price is ` 160, the weighted average cost of capital will reduce by 1.5%
(17.2% – 15.7%).
(c) If tax rate is considered
Cost of debt = Interest (1 – tax rate) Debentures = 0.12 (1 – 0.40) = 7.2%
Term loan = 0.18 (1 – 0.40) = 10.8%
The cost of capital after tax benefit [as per premises (a)]
Sources of Capital Amount Cost of Proportion Weighted Cost
(` in Lacs) Capital
Equity Share Capital 400 20% 400/2000 4%
12% Debentures 400 7.2% 400/2000 1.44%
18% Term loan 1200 10.8% 1200/2000 6.48%
2000 11.92%

Cost of capital after tax benefit [premises (b)]
Sources Amount Cost of Capital Proportion Weighted Cost
(` in Lacs)

Equity Share Capital 400 12.5% 400/2000 2.5%
12% Debentures 400 7.2% 400/2000 1.44%
18% Term loan 1200 10.8% 1200/2000 6.48%
2000 10.42%

Illustration 4.1.27
International funds has the following capital structure:
B§Q>aZoeZb ’§$S²>g H$s H¡${nQ>b ñQ´>³Ma {ZåZ{b{IV h¡…

Particulars Book value Market value
({ddaU) (~wH$ d¡ë¶y) (‘mH}$Q> d¡ë¶y)
(`) (`)

Equity capital (25 lakh shares of ` 10 par)
Bp³dQ>r H¡${nQ>b (` 10 nma Ho$ 25 bmI eo¶g©) 2,50,00,000 4,50,00,000
Preference capital (50,000 shares of ` 100 par, carry-
ing 13% dividend)/ {à’$a|g H¡${nQ>b (` 100 nma Ho$
50,000 eo¶g©, H¡$[a¨J 13% {S>{dS>|S>) 50,00,000 45,00,000
Reserves and Surplus / [aOìg© VWm gaßbg 1,50,00,000 –
Debentures (1,50,000 debentures of ` 100 par carry-
ing 14% interest) / {S>~|Mg© (` 100 nma Ho$ 1,50,000
{S>~|Mg© H¡$[a¨J 14% B§Q>aoñQ>) 1,50,00,000 1,45,00,000
6,00,00,000 6,40,00,000