Page 336 - Corporate Finance PDF Final new link

NPP

336 Corporate Finance BRILLIANT’S

Cost of Equity
Div 2
K = + growth rate = + 0.10 = 0.1455 or 14.55%
e MP 44
and K = K = 14.55%
r e
(d) Computation of overall weighted average cost of additional finance (after tax)

Sources Amount Weight Rate COC
(`)
Retained earnings 2.1 0.21 14.55 3.056
Equity share capital 5.53 0.553 14.55 8.045
Debt 2.37 0.237 5.72 1.356
10 WACC 12.46%

FORMULAE : AT A GLANCE

1. Cost of Debts (perpetual):
I
Before tax: K =  100 After tax: K = K (1 – t)
i NP d i
Where, K = Cost of debt (Before tax) Where, K = Cost of debt (after tax)
i d
I = Annual Interest K = Cost of debt (before tax)
i
NP = Net proceeds t = Tax rate
2. Cost of Debts (Redeemable):

I (RV * NP)  RV * NP 
n  I 1 t  
Before tax: K =  100 After tax: K  n
i (RV NP) d RV NP

2
2
*RV = Redemption Value
3. Cost of Preference Share (Perpetual):
DIV
K   100
p
NP
4. Cost of Preference Share (Redeemable):

(RV NP)
Div 
n
K  (RV NP)  100
p

2