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Cost of Capital Numericals

The document contains 5 questions about calculating costs of capital using various methods and inputs like CAPM, WACC, dividend growth models. Question 1 asks to calculate cost of equity using CAPM given beta, risk free rate and market return. Question 2 asks to calculate target share price and advise on purchase using a dividend growth model. Question 3 asks to calculate cost of capital using book and market weights of different sources of capital. Question 4 asks to calculate WACC using costs of equity, debt and loans along with their book and market values. Question 5 asks to value a share using a two-stage dividend growth model with changing growth rates.

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Mohit Maheshwari
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86 views2 pages

Cost of Capital Numericals

The document contains 5 questions about calculating costs of capital using various methods and inputs like CAPM, WACC, dividend growth models. Question 1 asks to calculate cost of equity using CAPM given beta, risk free rate and market return. Question 2 asks to calculate target share price and advise on purchase using a dividend growth model. Question 3 asks to calculate cost of capital using book and market weights of different sources of capital. Question 4 asks to calculate WACC using costs of equity, debt and loans along with their book and market values. Question 5 asks to value a share using a two-stage dividend growth model with changing growth rates.

Uploaded by

Mohit Maheshwari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem Solving Cost of Capital

Q1. From the following information, determine the cost of equity capital using
CAPM approach:
a) Required Rate of Return on Risk free security, 8 percent.
b) Required Rate of Return on Market Portfolio of Investment, 13 Percent
c) The firm’s beta is 1.6

Q2. The beta coefficient of Target Ltd is 1.4. The company has been
maintaining 8 percent rate of growth in dividends and earnings. The last
dividend paid was INR4 per share. The return on government securities is 10
percent while the return on market portfolio is 15 percent. The current market
price of one share of Target Ltd is INR36.
a) What will be the equilibrium price per share of Target Ltd?
b) Would you advise purchasing the share?
Q3. From the following capital structure of XYZ Ltd, determine the Cost of
Capital using Book Value Weights and Market Value Weights:
INR Crore
Equity Capital (in Shares of INR10 each, fully INR 15
paid
12% Preference Capital (in shares of INR INR 1
100 each, fully paid-at par)
Retained Earning INR 20
11.5% Debentures (of INR100 each) INR 10
11% Term Loans INR 12.5

The next expected dividend on equity share per share is INR 3.6, the dividend
is expected to grow at the rate of 7 percent. The market price per share is INR
40.
Preference stock, redeemable after ten years are selling at INR 75 per share.
Debentures, redeemable after six years are selling at INR80 per debenture.
Tax rate is 40 percent.
Q4. From the following data, calculate WACC:
Cost of Equity-12 percent
After tax cost of debt-7%
After tax cost of short term loans-4%
Sources of Book Value Market Value
Capital
Equity INR 500,000 INR 750,000
Long Term Debt INR400,000 INR3,75,000

Short Term Debt INR100,000 INR100,000

Q5. An investor has invested in a company which is growing at an above


average rate of 20 percent for 15 years and then 7% rate forever. The
capitalization rate is 9 percent and the current dividend is INR 1 per share.
Calculate Value per share.

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