Cost of Capital Mini Cases

Topics: Dividend yield, P/E ratio, Stock Pages: 3 (1131 words) Published: December 17, 2011
Mini Cases: Cost of Capital Part A: Cost of Debt
Mini Case 1: Cost of perpetual/Irredeemable debt Ashok Leyland issued Rs 100 Lakhs 12% debentures of Rs. 100 each. Calculate the cost of debt in each of the following cases. (Assume corporate tax rate being 40%). Case (a) If debentures are issued at par with no floatation cost. Case (b) If debentures are issued at par with 5% floatation cost. Case (c) If debentures are issued at 10% premium with 5% floatation cost. Case (d) If debentures are issued at 10% discount with 5% floatation cost.

Mini Case 2: Cost of debt redeemable [at par] in Lumpsum Ashok Leyland issued Rs 100 Lakhs 12% debentures of Rs. 100 each, redeemable at par after 5 years. Calculate the cost of debt in each of the following cases. (Assume corporate tax rate being 40%). Case (a) If debentures are issued at par with no floatation cost. Case (b) If debentures are issued at par with 5% floatation cost. Case (c) If debentures are issued at 10% premium with 5% floatation cost. Case (d) If debentures are issued at 10% discount with 5% floatation cost. Mini Case 3: Cost of debt redeemable [at premium] in Lumpsum Ashok Leyland issued Rs 100 Lakhs 12% debentures of Rs. 100 each, redeemable at premium of 5% after 5 years. Calculate the cost of debt in each of the following cases. (Assume corporate tax rate being 40%). Case (a) If debentures are issued at par with no floatation cost. Case (b) If debentures are issued at par with 5% floatation cost. Case (c) If debentures are issued at 10% premium with 5% floatation cost. Case (d) If debentures are issued at 10% discount with 5% floatation cost. Special Note: Cost of debt redeemable [at discount] in Lumpsum *Note that nobody will subscribe to debt which is redeemable at discount. Special Note: “Cost of debt” redeemable in Installments: We are not solving cases which deal with determining “cost of debt” redeemable in Installments in FM-1 course.

Part B: Cost of Preference shares
Mini Case 1: Cost of...
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