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# 1)     X is a shareholder in A Ltd. Although earnings for the A Ltd. Have varied considerably, X has

determined that the long-run average dividends for the firm have been \$2 per share. He expects a similar pattern to prevail in the future. Given the volatility of the A's dividend, X has decided that a minimum rate of 20% should be earned on his share. What price would X be willing to pay for the A's shares?

(\$10 per share)

2)     The shares of a company are currently being traded at a price of \$20 and the expected growth rate in dividend payment is 5%. Find the cost of equity capital if the dividend paid last year is

(a) \$2

(b) \$3

(c) \$4

(15.5%, 20.75%, 26%)

3)     The market price of a share is \$90 and the growth rate of a dividend is 12%. The earning per share are \$18. You are required to find out the cost of retained earnings.

(32%)

4)     X Ltd. Is currently earning \$100,000 and its share is selling at a market price of \$80. The firm has 10,000 share outstanding and has no debt. The earnings of the firm are expected to remain stable, and it has a payout ratio of 100%. What is the cost of equity? If the firm's payout ratio is assumed to be 60% and that it earns 15% rate of returns on its investment opportunities, then what would be the firm's cost of equity?

((i) 12.5%, (ii) 13.5%)

5)     Y Ltd. Is likely to maintain growth rate of 12% for the next five years and thereafter a constant rate of 7%. The company declared dividend of \$2.50 per share last year. If the shareholders expected rate of return is 16%. What should be the fair price/intrinsic value of the share?

(\$33.41)

6)     Given the risk free interest rate (Rf)                       =             5.50%

Return on the market portfolio                             =             19%

β (coefficient of systematic risk)                        =              0.25%

Calculate cost of equity capital

(11.63%)

7)     The following information is available from the balance sheet of a company.

Equity share capital

20,000 share of \$10 each                                                                 \$200,000

Reserve and surplus                                                                          \$130,000

8% Debenture                                                                                    \$170,000

The rate of tax of the company is 50%. Current level of equity dividend is 12%.

Calculate the weighted average cost of capital using the above figures.

(9.28%)

8)     Jones Industries Ltd. Has assets of \$160,000 which have been financed with %52,000 of debt and \$90,000 of equity and a general reserve of \$18,000. The firm's total profits after interest and taxes for the years ended 31st March, 2011 were \$13,500. It pays 8% interest on borrowing funds and is in the 50% tax bracket. It has 900 equity shares of \$100 each selling at a market price of \$120 per share. What is the weighted average cost capital?

(9.74%)

9)     A company has the following capital structure:

Securities                                            Book value \$                                     After tax cost %

Equity Capital                                     850,000                                              15

Retained Earnings                             225,000                                              10

Preferred Capital                               150,000                                              18

Debenture                                          1,000,000                                           6

Total                                                     2,225,000

From the above information, you are required to find out the weighted average cost of capital of a company

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