Query-cost of capital

vijay ltd equity share is selling at rs. 50.  the company expects its eps of rs. 7.5.     co. has a policy of paying 60 % of its earnings as dividends.the co. earns a return of 10% on its re invested profit.

co. has plans for expansion for which it wants to issue a 10 year, 8 percent rs 1000 per bond at a premium of rs 20 .underwriting commission = rs 40/bond.              tax rate = 35 %.

after issue of bonds co. wishes to have debt equity ratio of 30:70.

work out cost of equity,after tax cost of bond and overall cost of capital.

 

doubt:  how to deal with retained earnings and corresponding overall cost of cap in this ques.?????

Replies (1)
dear kavya applying the earnings price approach the cost of equity is calculated as EPS/MPS = 7.5/50 = .15 = 15 % cost of the debt is calculated as Kd = [I(1-t) +( RV - SV) / n]/ (RV-SV)/2 it comes to 20.52 % suppose 100 is the earnings then 60 is distributed as dividend . the remaining is retained earnings for calculating overall cost of capital weighted average cost of capital is to be applied the cost of retained earnings to be calculated by multiplying 40% to the amount of equity ok ....

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