Question

# 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 (R_{f}) = 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 31^{st} 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

(10.65%)

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