Page 334 - Corporate Finance PDF Final new link

334 Corporate Finance BRILLIANT’S

(c) If the company’s cost of capital is 8% and the anticipated growth rate is 5% p.a., calculate
the indicated market price if the dividend of ` 1 per share is to be maintained.
AmnH$s H§$nZr H$m eo¶a ~mOma ‘| dV©‘mZ ‘| ` 20 H$moQ> {H$¶m J¶m h¡& H§$nZr go ` 1 à{V eo¶a Ho$ {S>{dS>|S> Ho$
^wJVmZ H$s Anojm h¡ VWm Bd|ñQ>a ~mOma Ho$ 5% à{V df© H$s d¥{Õ Xa H$s Anojm H$aVm h¡…
(a) H§$nZr H$s H¡${nQ>b H$s Bp³dQ>r H$m°ñQ> H$s JUZm H$a|&
(b) ¶{X AZw‘m{ZV d¥{Õ Xa 6% à{V df© h¡, à{V eo¶a g§Ho$V {H$¶o J¶o ~mOma ‘yë¶ H$s JUZm H$s{OE&
(c) ¶{X H§$nZr Ho$ H¡${nQ>b H$s H$m°ñQ> 8% h¡ VWm AZw‘m{ZV d¥{Õ Xa 5% à{V df© h¡, g§Ho$V {H$¶o J¶o ~mOma ‘yë¶
H$s JUZm H$s{OE ¶{X `1 à{V eo¶a H$m {S>{dS>|S> ~Zm¶o aIZm h¡&

Solution:
(a) Cost of Equity (K ):
e 1
Div. = ` 1;  0.04 = MP
g = 5%;
MP = ` 20 1
 MP =
0.04
Div
So, K = + g
e MP NPP  MP = ` 25 per share
(c) K = 8%, Div = ` 1, g = 5%
1 e
 K = + 0.05
e
20 Div
K = + g
 K = 0.10 or 10% e MP
e
(b) When g = 6%, find MP = ?
1
Div  8% = + 0.05
K = + g MP
e MP
1
1  0.08 – 0.05 =
 10% = + 0.06 MP
MP
1
10 1  MP = = ` 33.33
 – 0.06 = 0.03
100 MP
Illustration 4.1.29
Aries Ltd. wishes to raise additional finance of ` 10 lacs for meeting its expansion plans. It has
` 2.10 lacs in the form of retained earnings available for investment purpose. Following are the
further details:
EarO {b{‘Q>oS> BgH$s {dñVma ¶moOZm H$mo nyam H$aZo Ho$ {bE `10 bmI H$m A{V[a³V ’$m¶Z|g boZo H$s BÀN>m aIVr
h¡& BgHo$ nmg {Zdoe CÔoí¶ Ho$ {bE CnbãY [aQ>|S> A{Zª½g Ho$ ê$n ‘| ` 2.10 bmI h¢& AmJo Ho$ {ddaU ZrMo {X¶o J¶o h¢…

Debt/Equity Mix / S>oãQ>/Bp³dQ>r {‘³g 30%/70%
Before Tax Cost of Debt: / S>oãQ> H$s Q>¡³g H$m°ñQ> Ho$ nhbo
Up to ` 1,80,000 ` 1,80,000 VH$ 10%
Beyond ` 1,80,000 / ` 1,80,000 Ho$ D$na  16%