9/26/2018 Cost of Capital Solved Problems | Cost Of Capital | Capital Structure

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Calculate the cost of capital in the following cases:

i)  X Ltd. issues 12% Debentures of face value Rs. 100 each and realize
 Top Charts The Debentures are redeemable after 10 years at a premium of 10%.
ii)  Y. Ltd. issues 14% preference shares of face value Rs. 100 each Rs. 9
are repayable after 12 years at par.
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Note: Both companies are paying income tax at 50%.

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Solution
 Magazines
(i)  Cost of Debt
 News

k d  [Int + (RV – SV) / N] (1 – t)

 Documents
(RV + SV) / 2

 Sheet Music Int = Annual interest to be paid i.e. Rs. 12

t = Company’s effective tax rate i.e. 50% or 0.50
RV = Redemption value per Debenture i.e. Rs. 110
N = Number of years to maturity = 10 years
SV = issue price per debenture minus floatation cost i.e. Rs. 95

[12 + (110 – 95) / 10] (1 – .5)

k d =
(110 + 95) / 2

[12 + 2.5](0.5) 7.25

= = = 7.43%
97.50 97.50

(ii) Cost of preference capital

D + (RV – SV) / N
k
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