Case 1 A

Issue at par Rs.100

a Coupon Rate net of taxes

Case 1
b
7.2%
a

b Apportionment on tenure

1.25

c Cost of flotation,Premium on
redemptionn less issue

10%

102.5

d Avg of issue price and redemption price

COST OF DEBT

8.24%
Those worked in excel a decimal variation is acceptable

issue at premium Rs.110

Case 1c

Issue at discount Rs.90

Coupon Rate net of taxes

7.20%

Coupon Rate net of taxes

7.20%

Apportionment on tenure

Apportionment on tenure

1.875

Cost of flotation,Premium on
redemptionn less issue

Cost of flotation,Premium on
redemptionn less issue

Avg of issue price and redemption price

107.5

Avg of issue price and

redemption price

COST OF DEBT

6.70%

Those worked in excel a decimal variation is acceptable

COST OF DEBT

15
97.5

9.62%

Marks 6

Case 1

Issue price is a Rs.90

Case 2

1 Coupon payment net of taxes is

9.75

2 Cost of flotation+premium on
redemption-premium on issue
3 Apportionment over tenure of
debenture
3 Avg issue and redemption price

10

2 *since it is considered +
or - 10
95

Cost of debt

12.37%

Issue price is Rs.110

Coupon payment net of taxes
is
Cost of flotation+premium on
redemption-premium on
Apportionment over tenure
of debenture
Avg issue and redemption
price
Cost of debt

Marks 4
9.75
-10
-2
105

7.38%

Case One
Determining the optimal capital structure

1
2
3
4
5
6
7

Equity Weight Cost

Debt WeightCost
WACC
100
14%
0
0
14
90
15%
10
10%
14.5
80
15%
20
11.50%
14.3
60
15%
40
12%
13.8
50
16%
50
12.50%
14.25
40
18%
60
14%
15.6
30
20%
70
15%
16.5

Considering only the WACC hurdle rate basis capital structure with no debt is conclusive. However debt is acheaper souce o
Case two
Optimal Debt Ratio for the firm at different levels of debt:
Debt Weight
1
2
3
4
5
6
7

Cost
0
10
20
40
50
60
70

0
10%
11.50%
12%
12.50%
14%
15%

Equity Weight
Cost
100
90
80
60
50
40
30

14%
15%
15%
15%
16%
18%
20%

WACC
14.0
14.5
14.3
13.8
14.3
15.6
16.5

In terms of optimal debt for the organisation maintaining the balance with equity plus taking tax advantage and cost factor
However, one also needs to consider at what level of operations the organisation has been. Since business entities evolve fr
WACC column is indicative of COC at varying levels of debt.

bt is conclusive. However debt is acheaper souce of finance due to the tax advantage , hence option four is desirable.

equity plus taking tax advantage and cost factor option four again is desirable.
isation has been. Since business entities evolve from debt to equity (ie from 100% debt to a balanced debt equity ratio)

WACC as per the Book value

Weight
Equity
Prf. Shares
Debt

Cost
0.5
0.2
0.3

WACC
9.0%
3.0%
2.1%

14.1%

WACC
18%
12.6%
15%
2.3%
7%
1.1%

15.9%

18%
15%
7%

WACC as per the Market value

Weight
Equity
Prf. Shares
Debt

0.7
0.15
0.15

Cost

Marginal or Incremental WACC for expansion plans is considered at existing level of cost since no data on incremental capital struc

Equity
Prf. Shares
Debt

Weight
Cost
WACC
0.15
18%
2.7%
0.35
15%
5.3%
0.5
7%
3.5%

11.5%

since no data on incremental capital structure has been provided.