Fundamentals of Financial Management, Third Edition

SOLVED NUMERICAL PROBLEMS

1. Company A sells Rs 100 preference shares at a dividend of Rs 12. If it were to sell debentures, interest rate cost would be 13%. Tax rate is 30%. Find (a) the after-tax cost of each of the financing method, and (b) the after-tax return if you invest in these instruments.

   Solution

   Cost:

   Preference shares = 12/100 = 0.12 = 12%

   Debentures = 13% (1 – 0.30) = 0.091 = 9.1%

   Return from investment:

   Debt = 13% (1 – 0.30) = 9.1%

   Preference shares assuming 50% tax exemption

   = 12% {1 – (0.5 0.3)} = 0.1020 = 10.20%

    

2. The market value of a share of a company is Rs 140. The company has issued rights shares. The existing shareholders are allowed to subscribe for one additional share at a price of Rs 120 for each 9 rights held. Compute ...