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Question
Given Face value (F) = Rs. 500
Issue price (f) = 4%
Tax (T) = 35%
Interest (I) = 15%
Time (n) = 10 years
P – Net amount realized
R = Maturity Value
F (big) = Face Value
f(small) = issue price
(here face value = redeemed price)
( R − P)
C (1 − T ) +
n
Kd = ( R + P)
2
(500 − 480 )
75 (1 − .35 ) +
10
(500 + 480 )
2
R= 100 + 5% of 100
100 + 5
Rs. 105
(105 − 97 )
12 +
kp = 7
(105 + 97 )
2
0.13
0.13 x 100
13%
0.123
0.123 x 100
12.3%
Cost of Loan
Kl = I (1-T)
No flotation cost
I = Interest
T = Tax rate
No illustration needed as it is simple
D2 = D1( 1 + g )
D0 ( 1 + g ) 2
D3 = D2( 1 + g )
D0 ( 1 + g ) 3
D1
ke = +g
P
P Rs. 30
g = ? (have to compute)
D0 = 3
Time = 7 years
2 ------------------------------------- 3
7 years
2 x FVIF ( g% , 7 ) = 3
FVIF ( g% , 7 ) = 3/2
FVIF ( g% , 7 ) = 1.5
D1
ke = +g
P
D 0(1 + g )
ke = +g
P
3(1 + 0.06 )
ke = + 0.06
30
0.166
0.166 x 100
16.6%
β ( rm - rf )
Therefore,
Ke = rf + β ( rm – rf )
90 ,000
Wp = 48 ,40 ,000 0.018 (weight of preference capital)
11 ,00 ,000
Wd = 48 ,40 ,000 0.227 (weight of debenture capital)
1,00 ,000
Wl = 48 ,40 ,000 0.02 (weight of loan capital)
D1
ke = +g
P
Therefore
6
ke = + 0.02
35
= 0.37
0.37 x 100
37%
P = Rs. 90
12
kp =
90
0.13 or 13%
0.06 or 6%
0.15 x 0.5
0.075 or 7.5%
0.37 or 37%