Page 335 - Corporate Finance PDF Final new link

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BRILLIANT’S Cost of Capital 335

Earning Per Share / à{V eo¶a A{ZªJ ` 4
Dividend Pay Out Ratio / {S>{dS>|S> no AmCQ> aoemo 50%

Expected Dividend Growth Rate / Ano{jV {S>{dS>|S> J«moW aoQ> 10%
Current Market Price/Share / H$a§Q> ‘mH}$Q> àmBg/eo¶a ` 44
Tax Rate / Q>¡³g aoQ> 50%

You are required to: / AmnH$mo H$aZm h¡…
(a) determine the pattern of raising additional finance.
A{V[a³V ’$m¶Z|g àmßV H$aZo H$s nÕ{V H$m {ZYm©aU
(b) determine the post tax cost of additional debt.
A{V[a³V S>oãQ> H$s nmoñQ> Q>¡³g H$m°ñQ> H$m {ZYm©aU
(c) determine the cost of equity and retained earnings.
Bp³dQ>r VWm [aQ>|S> A{Zª½g H$s H$m°ñQ> H$m {ZYm©aU
(d) Compute overall weighted average cost of additional finance (after tax).
A{V[a³V ’$m¶Z|g (Q>¡³g Ho$ níMmV²) H$s g§nyU© doQ>oS> EdaoO H$m°ñQ> H$s JUZm
Solution:
Total additional fund require will be ` 10 lacs.
Out of which ` 2.10 lacs is raised from retain earnings.
and remaining 7.9 lacs is to be raised from Debt/Equity finance in the ratio of 3:7.
i.e. from Debt ` 2.37 lacs is to be raise & from Equity ` 5.53 lacs is to be raise. Out of ` 2.37
lacs, ` 1.8 lacs will be raised @ 10% & Remaining ` 0.57 will be raised @ 16%.
(a) Pattern of raising Additional Finance
Retained Earnings ` 2.1 lacs
Equity share capital ` 5.53 lacs
Debt @ 10% ` 1.8 lacs
Debt @ 16% ` 0.57 lacs
` 10 lacs
(b) Calculation of Cost of Debts (after tax)
10 27,120
1,80,000 × = 18,000 K = × 100 = 11.44%
100 i 2,37,000
16
57,000 × = 9,120 K = 11.44(1 – 0.5) = 5.72%
100 d
27,120
(c) Determination of Cost of Equity and Retained Earnings
Div = EPS × Dividend payout ratio
= ` 4 × 50% = ` 2