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Assignment On Cost of Capital: Year Dividend

This document contains 6 questions related to cost of capital concepts. Question 1 asks to calculate growth rates, dividend yield, and required rate of return based on dividend and share price information. Question 2 asks to calculate earnings growth rate based on past earnings. Question 3 asks to calculate dividend growth rate based on past dividend payments. Question 4 asks to calculate weighted average cost of capital (WACC) for a company with equity shares, preference shares, and debentures, as well as the revised WACC after taking on additional debt. Question 5 asks to calculate earnings per share under different financing plans involving equity, debt, or a mix. Question 6 asks to calculate the net present value of a project based on its earnings, depreciation

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57 views2 pages

Assignment On Cost of Capital: Year Dividend

This document contains 6 questions related to cost of capital concepts. Question 1 asks to calculate growth rates, dividend yield, and required rate of return based on dividend and share price information. Question 2 asks to calculate earnings growth rate based on past earnings. Question 3 asks to calculate dividend growth rate based on past dividend payments. Question 4 asks to calculate weighted average cost of capital (WACC) for a company with equity shares, preference shares, and debentures, as well as the revised WACC after taking on additional debt. Question 5 asks to calculate earnings per share under different financing plans involving equity, debt, or a mix. Question 6 asks to calculate the net present value of a project based on its earnings, depreciation

Uploaded by

Amit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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ASSIGNMENT ON COST OF CAPITAL

1. Mr X an investor, purchases an equity share of a growing company, Y for Rs 210.


He expects the company to pay dividends of Rs 10.5, Rs 11.025 and Rs 11.575
in years 1, 2 and 3, respectively. He expects to sell the shares at a price of Rs
243.10 at the end of 3 years.

i. Determine the growth rate in dividend.


ii. Calculate the current dividend yield
iii. What is the required r a t e of return of Mr X on his equity
investments?
2. If current earning are Rs 2.76 a share, while 10 years earlier, they were Rs 2,
what has been the rate of growth in earnings?
a. If a company is paying currently a dividend of Rs 6 per share, whereas 5
years before it was paying Rs 5 per share, what has been the rate of
growth in dividends?
b. A company which is not subject to growth expects to pay dividend of Rs
12 per share for ever. Calculate the value of a share, assuming 10 per
cent as the appropriate discount rate for such a company

3. A company is contemplating an issue of new equity shares. The firm’s equity


shares are currently selling at Rs 125 a share. The historical pattern of dividend
payments per share, for the last 5 years is given below:
Year Dividend
1 Rs 10.70
2 11.45
3 12.25
4 13.11
5 14.03
The flotation costs are expected to be 3 per cent of the current selling price of
the shares. You are required to determine growth rate in dividends.

4. The following is the capital structure of Simons company Ltd. as on 31st


March, current year
Equity share: 10,000 shares (of Rs 100 each) Rs 10,00,000
12% Preference shares (of Rs 100 each) 4,00,000
10% Debentures 6,00,000
20,00,000
The market price of the company’s share is Rs 110 and it is expected that a
dividend of Rs 10 per share would be declared at the end of the current year.
The dividend growth rate is 6 per cent.
(i) If the company is in the 35 per cent tax bracket, compute the weighted
average cost of capital.
(iii) Assuming that in order to finance an expansion plan, the company
intends to borrow a fund of Rs 10 lakh bearing 12 per cent rate of interest,
what will be the company’s revised weighted average cost of capital? This
financing decision is expected to increase dividend from Rs 10 to Rs 12 per share.
However, the market price of equity share is expected to decline from Rs 110
to Rs 105 per share

5. A Ltd. Company has equity share capital of Rs. 5, 00,000 divided into shares of Rs. 100
each. It wishes to raise further Rs. 3, 00,000 for expansion cum modernization plans.
The company plans the following financial schemes.
a. All Common Stock
b. Rs. one lakh in common stock and Rs. two lakh in 10% debentures.
c. All debt at 10%
d. Rs. one lakh in common stock and Rs. two lakhs in preferences capital with the
rate of dividend at 8%.
The company’s existing earnings before interest and tax (EBIT) are Rs. 1, 50,000 The
Corporate rate of tax is 50%. You are required to determining the earning per share (EPS)
in each plan and comment on the implication of financial leverage.

6. A Company is considering investment in a project that cost Rs. 2, 00,000. The project has
an expected life of 5 years and Zero salvage value. The company uses straight line
method of depreciation. The company’s tax rate is 40%. The estimated earnings before
depreciation and before tax from the project are as follows:

Year Earnings before depreciation and Presented value factor at 10%


tax

1 70,000 0.909

2 80,000 0.826

3 1,20,000 0.751

4 90,000 0.683

5 60,000 0.621

You are required to calculate the net present value at 10% and advise the company.

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