Chapter 4: Cost of Capital
Topic: Computation of WACC
Practice Questions
Question 1.
The following is an extract from the Financial Statement of Shiva Limited:
Particulars `
Operating Profit 105.0
Less: Interest on Debentures 33.0
Earnings Before Taxes 72.0
Less: Income Tax (35%) 25.2
Earnings after Taxes 46.8
Equity Share Capital (Shares of ` 10 each) 200.0
Reserves and Surplus 100.0
15% Non-Convertible Debentures (of ` 100 each) 220.0
Total Capital Employed 520.0
The Market Price per Equity Share is ` 12 and per Debenture is ` 93.75.
Calculate: (1) Earnings per Share, (2) Percentage Cost of Capital to the Company for
Debentures and Equity.
Solution:
Earning After Tax Rs.46.8 Lakhs
1. EPS = = = ` 2.34.
No.of Equity Shares 20 Lakhs Shares
EPS Rs.2.34
2. Ke = = = 19.50%
MPS Rs.12.00
3. Cost of Debt Kd may be computed as under –
Particulars Book Value Basis Market Value Basis
(a) Interest × (100% - Tax Rate 50%) ` 15 × 65% = ` 9.75 Lakhs ` 15 × 65% = ` 9.75 Lakhs
Book Value Market Price =
(b) Value of Debentures
= ` 100.00 Lakhs ` 93.75
Interest×(100%−Tax) (b)
(c) Kd = = 9.75% 10.40%
Value of Debt (a)
Note: Cost of Debentures based on Market Value is more appropriate.
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, Question 2.
SK Limited has obtained funds from the following sources, the specific cost are also given
against them:
Source of Funds Amount Cost of Capital
Equity Shares ` 30,00,000 15%
Preference Shares ` 8,00,000 8%
Retained Earnings ` 12,00,000 11%
Debentures ` 10,00,000 9% (before tax)
You are required to calculate Weighted Average Cost of Capital. Assume that Corporate Tax
Rate is 30%.
Solution: Computation of WACC
Component ` % Individual Cost WACC
Equity Shares 30,00,000 50.00% Ke (Given) = 15.00% 7.50%
Preference Shares 8,00,000 13.33% Kp (Given) = 8.00% 1.07%
Retained Earnings 12,00,000 20.00% Kr (Given) = 11.00% 2.20%
Debentures 10,00,000 16.67% Kd =9% × (100% - 30%)=6.30% 1.05%
Total 60,00,000 100.00% WACC = Ko = 11.82%
Question 3.
The Capital Structure of a Company consists of Equity Shares of ` 50 Lakhs, 10%
Preference Shares of ` 10 Lakhs and 12% Debentures of ` 30 Lakhs. The Cost of Equity
Capital for the Company is 14.7% and Income-Tax Rate for this Company is 30%. You are
required to calculate the Weighted Average Cost of Capital (WACC).
Solution:
Computation of WACC is as under –
Component ` Lakhs Ratio Individual Cost WACC
3 Kd = Interest ×(100% - Tax) = 12% × (100%-
Debt 30 10.20%
9 30%) = 8.40%
1
Preference 10 Kp = Given = 10.00% 1.11%
9
5
Equity 50 Ke (given) = 14.70% 8.17%
9
Total 90 Ko = 12.08%
Contact - 9228446565 www.konceptca.com
Topic: Computation of WACC
Practice Questions
Question 1.
The following is an extract from the Financial Statement of Shiva Limited:
Particulars `
Operating Profit 105.0
Less: Interest on Debentures 33.0
Earnings Before Taxes 72.0
Less: Income Tax (35%) 25.2
Earnings after Taxes 46.8
Equity Share Capital (Shares of ` 10 each) 200.0
Reserves and Surplus 100.0
15% Non-Convertible Debentures (of ` 100 each) 220.0
Total Capital Employed 520.0
The Market Price per Equity Share is ` 12 and per Debenture is ` 93.75.
Calculate: (1) Earnings per Share, (2) Percentage Cost of Capital to the Company for
Debentures and Equity.
Solution:
Earning After Tax Rs.46.8 Lakhs
1. EPS = = = ` 2.34.
No.of Equity Shares 20 Lakhs Shares
EPS Rs.2.34
2. Ke = = = 19.50%
MPS Rs.12.00
3. Cost of Debt Kd may be computed as under –
Particulars Book Value Basis Market Value Basis
(a) Interest × (100% - Tax Rate 50%) ` 15 × 65% = ` 9.75 Lakhs ` 15 × 65% = ` 9.75 Lakhs
Book Value Market Price =
(b) Value of Debentures
= ` 100.00 Lakhs ` 93.75
Interest×(100%−Tax) (b)
(c) Kd = = 9.75% 10.40%
Value of Debt (a)
Note: Cost of Debentures based on Market Value is more appropriate.
Contact - 9228446565 www.konceptca.com
, Question 2.
SK Limited has obtained funds from the following sources, the specific cost are also given
against them:
Source of Funds Amount Cost of Capital
Equity Shares ` 30,00,000 15%
Preference Shares ` 8,00,000 8%
Retained Earnings ` 12,00,000 11%
Debentures ` 10,00,000 9% (before tax)
You are required to calculate Weighted Average Cost of Capital. Assume that Corporate Tax
Rate is 30%.
Solution: Computation of WACC
Component ` % Individual Cost WACC
Equity Shares 30,00,000 50.00% Ke (Given) = 15.00% 7.50%
Preference Shares 8,00,000 13.33% Kp (Given) = 8.00% 1.07%
Retained Earnings 12,00,000 20.00% Kr (Given) = 11.00% 2.20%
Debentures 10,00,000 16.67% Kd =9% × (100% - 30%)=6.30% 1.05%
Total 60,00,000 100.00% WACC = Ko = 11.82%
Question 3.
The Capital Structure of a Company consists of Equity Shares of ` 50 Lakhs, 10%
Preference Shares of ` 10 Lakhs and 12% Debentures of ` 30 Lakhs. The Cost of Equity
Capital for the Company is 14.7% and Income-Tax Rate for this Company is 30%. You are
required to calculate the Weighted Average Cost of Capital (WACC).
Solution:
Computation of WACC is as under –
Component ` Lakhs Ratio Individual Cost WACC
3 Kd = Interest ×(100% - Tax) = 12% × (100%-
Debt 30 10.20%
9 30%) = 8.40%
1
Preference 10 Kp = Given = 10.00% 1.11%
9
5
Equity 50 Ke (given) = 14.70% 8.17%
9
Total 90 Ko = 12.08%
Contact - 9228446565 www.konceptca.com
