Question 1

The following information refers to LN Ltd, a stock-exchange listed company.

Extract from Income Statement for the year ended 30 June 2012

Rs m
Net Profit after tax 75.00
Retained Earnings at start 24.40
99.40
Dividends on Ordinary Shares 42.00
Dividends on Preference Shares 5.95
Retained earnings at end 51.45

Statement of Financial Position as at 30 June 2012

Rs m Rs m
Assets
Non-Current Assets
Land and Buildings 311.00
Furniture and Fittings 212.00
Plant and Equipment 104.65 627.65
Current Assets
Inventory 43.50
Trade Receivables 69.40
Prepayments 8.90 121.80

Total Assets 749.45

Equity and Liabilities

Non-Current Liabilities
Long Term Borrowings 224.00
Current Liabilities
Trade Payables 75.80
Accruals 20.70
Bank Overdraft 57.50
Total Liabilities 378.00
Total Equity and Liabilities 749.45

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Ordinary shares of LN Ltd were issued at Rs1.25 per share and they are currently traded at
Rs2.80 per share. The dividends of the company have grown in recent years by an average rate
of 4% per year.

Long-term borrowings of LN Ltd consist of 6% bonds that are redeemable in seven years’ time.
The bonds have a par value of Rs100 per bond and a current market price of Rs96.40 per bond.

LN Ltd issued preference shares at Rs5 per share and pays an annual dividend of 8.5%.
Preference shares of the company are currently traded at Rs5.95 per share.

The nominal rate of interest on bank overdraft is 8% p.a. and interest is calculated monthly.

LN Ltd pays tax on profit at an annual rate of 25%.

Required

Calculate the weighted average after-tax cost of capital of LN Ltd. Use market values
where appropriate.

Question 2

The following information refers to Terry Limited, a stock-exchange listed company.

Extract from Income Statement for the year ended 31 December 2011

Rs

Net Profit after tax 375,000

Retained Earnings at start 122,000

497,000

Dividends on Ordinary Shares 180,000

Dividends on Preference Shares 48,000

Retained Earnings at end 269,000

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Statement of Financial Position as at 31 December 2011

Rs Rs

Assets

Non Current Assets

Land and Buildings 2,100,000

Plant and Equipment 1,050,000 3,150,000

Current Assets

Inventory 198,530

Account Receivables 410,470 609,000

Total Assets 3,759,000

Equity and Liabilities

Equity

Ordinary Shares 1,000,000

Retained Earnings 269,000

1,269,000

8 % Preference Shares 600,000 1,869,000

Non Current Liabilities

11% Bonds 1,000,000

Current Liabilities

Accounts Payable 90,000

Bank 800,000

Total Liabilities 1,890,000

Total Equity and Liabilities 3,759,000

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 Additional information

 Ordinary shares were issued at Rs1 each and currently selling at Rs2.75
per share with a dividend growth rate of 5%

 The face value of bond is Rs100 and is currently selling at Rs106.50. They
mature in 8 years.

 Preference shares are currently selling at Rs9.30 per share and were
issued at Rs10 each.

 The nominal rate of interest on bank overdraft is 13%. Interest is

 The company pays tax at an annual rate of 25%

Required

Using market values where appropriate, calculate the weighted average after-tax cost of
capital of Terry Limited.

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Question 3

Normand Ltd is a stock-exchange listed company. Its Statement of Financial Position and an
extract of its Income Statement are provided.

Extract from Income Statement for the year ended 30 June 2012

Rs
Net Profit after tax 562,500
Retained Earnings at start 183,000
745,500
Dividends on Ordinary Shares 150,000
Dividends on Preference Shares 38,500
Retained Earnings at end 557,000

Statement of Financial Position as at 30 June 2012

Rs Rs
Assets
Non-Current Assets
Land and Buildings 1,146,000
Motor Vehicles 963,000
Plant and Equipment 1,250,000 3,359,000
Current Assets
Inventory 125,530
Prepayments 20,200
Trade Receivables 425,270 571,000
Total Assets 3,930,000
Equity and Liabilities
Equity
Ordinary Shares 1,500,000
Retained Earnings 557,000
2,057,000
7% Preference Shares 550,000 2,607,000
Non-Current Liabilities
9% Debentures 900,000
Current Liabilities
Trade Payables 67,000
Accruals 27,000
Bank 329,000
Total Liabilities 1,323,000
Total Equity and Liabilities 3,930,000

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Additional information

 Ordinary shares were issued at Rs1.50 each and currently selling at Rs2.45 per
share with a dividend growth rate of 6%

 The face value of debenture is Rs100 and is currently selling at Rs96.50. They
mature in 7 years.

 Preference shares are currently selling at Rs4.40 per share and were issued at Rs5
each.

 The nominal rate of interest on bank overdraft is 11%. Interest is calculated every
three months.

 The company pays tax on profit at an annual rate of 30%

Required

(a) Using market values where appropriate, calculate the weighted average after-tax
cost of capital of Normand Ltd.

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Question 4

Faubney Ltd is a stock-exchange listed company. The capital structure of the company
as at 31 December 2015 is as follows:

Rs million Rs million
Equity
Ordinary Shares of Rs2 per share 400
Reserves 300
700
11% Preference Shares 200
900
Non-Current Liabilities
Bond X (par value Rs1000) 400
Bond Y (par value Rs1000) 250
650
1,550
Faubney Ltd has an equity beta of 1.4. The risk-free rate of return is 4% per year and the
average return on the market is 12% per year. Ordinary dividend paid for the year 2015
was Rs120 million. The dividends of the company have grown in recent years by an
average rate of 5% per year.

The company issued preference shares at Rs1.25 per share and they are currently traded
at Rs1.40 per share.

Bond X will be redeemed at par in nine years’ time and pays annual interest of 9%. The
current market price of the bond is Rs960. Bond Y will be redeemed at par in four years’
time and pays annual interest of 7.5%. The current market price of the bond is Rs1050

Bond X and Bond Y were issued at the same time. The company pays tax on profit at an
annual rate of 20%.

Required

(a) Calculate the weighted average after-tax cost of capital for Faubney Ltd. Use
market values where appropriate.

(b) Discuss the reasons why different bonds of the same company might have
different costs of debt.