COST OF CAPITAL - SOLVE THIS PROBLEM

tarandeep singh saluja (CA FINAL) (398 Points)

13 February 2011

X ltd provides the following extracts from its accounts as at 31/03/2006

Capital & Reserve 15LACS

Debt IDBI loan 12% 10LACS

ACD loan 13.5% 25LACS

Capital Employed 50LACS

PBT 18LACS

Provision for TAX 4.5LACS

PAT 13.5LACS

Risk free Rate of business is 10% and premium expected is 5% Beta of X ltd is 1.28

a) Work out the Weighted Avg Cost of Capital

b)If Beta is reduced to 1.18 in future what will be the weighted avg cost of capital?????

ANS 11.78% & 11.63%

PLS ANY ONE GIVE ME THE SOLVED SOLUTION OF THIS PROBLEM..........THANKS IN ADVANCE :)

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3 Replies

CA.Shailesh Pathak (Finance officer in JUVNL) (123 Points)
Replied 13 February 2011

Cost for capital and reseve = Rf+( Rm-Rf)* Beta

Here, Rf=10%

(Rm-Rf)= Risk Premium= 5%

Beta=1.28

Hence,

Cost for capital and reserve = 10+5*1.28=16.40%

Tax rate=4.8/18=25%

Cost of capital = 16.4*15/50+12*.75*10/50+25*.75*13.5/50

=4.92+1.8+5.06

=11.78%

B) Cost for capital and reserve=10+5*1.18=15.90%

Cost of capital=15.90*15/50+12*.75*10/50+25*.75*13.5/50

=11.63%

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tarandeep singh saluja (CA FINAL) (398 Points)
Replied 13 February 2011

thanks shailesh.............

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Originally posted by : Shailesh Pathak
	Cost for capital and reseve = Rf+( Rm-Rf)* Beta Here, Rf=10% (Rm-Rf)= Risk Premium= 5% Beta=1.28 Hence, Cost for capital and reserve = 10+51.28=16.40% Tax rate=4.8/18=25% Cost of capital = 16.415/50+12.7510/50+25.7513.5/50 =4.92+1.8+5.06 =11.78% B) Cost for capital and reserve=10+51.18=15.90% Cost of capital=15.9015/50+12.7510/50+25.7513.5/50 =11.63%