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COST OF CAPITAL - SOLVE THIS PROBLEM

IPCC 2200 views 3 replies

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 :)

Replies (3)

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%


thanks shailesh.............
 

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+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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