Fundamentals of Financial Management, Third Edition

SOLVED NUMERICAL PROBLEMS

1. A company has issued only recently Rs 100 preference shares with an annual dividend of 10%. They are redeemable preference shares with a maturity of 10 years. Find the cost if floatation cost amounts to Rs 4 per share.

   Solution

   K_p = {10 + (4/10)}/{(100 + 96)/2} = 0.1061 = 10.61%

    

2. A company issues 10% Rs 100 debentures. The floatation cost is Rs 4. Tax rate is 30%. Debentures are redeemable after 5 years at a premium of Rs 3. The difference between the redemption value and the net amount realised is to be written off during the life time of the debentures. Find the cost of debt.

   Solution

   K_d = [{10 × (1 - 0.30)} + {(103 - 96)/5} × {1 - 0.30)] /(103 + 96)/2

       = 0.0802 = 8.02%

    

3. The market price of a company’s equity ...