Ajitanad Ltd. has furnished the following information, to work out the weighted average cost of capital of the firm : Earnings per share: ₹8 Dividend pay-out ratio: 25% Market price per share: ₹80 Tax rate: 30% Growth ra

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2019
Ajitanad Ltd. has furnished the following information, to work out the weighted average cost of capital of the firm : Earnings per share: ₹8 Dividend pay-out ratio: 25% Market price per share: ₹80 Tax rate: 30% Growth rate of dividend: 8% Additional need of funds: ₹10,00,000 Additional debt capital as part of total fund requirement: ₹4,00,000 Cost of debt (before tax) - up to ₹2,00,000: 10% Cost of debt (before tax) - beyond ₹2,00,000: 15% Compute from the above information, (i) After tax cost of equity,

Answer & Explanation:

(i) After-tax Cost of Equity (Ke) Earnings per share (EPS) = ₹8 Dividend pay-out ratio = 25% Dividend per share (D0) = EPS * Dividend pay-out ratio = ₹8 * 0.25 = ₹2 Growth rate of dividend (g) = 8% Market price per share (P0) = ₹80 Using Dividend Growth Model (Gordon's Model): Ke = [D1 / P0] + g Where D1 = D0 * (1 + g) = ₹2 * (1 + 0.08) = ₹2 * 1.08 = ₹2.16 Ke = [₹2.16 / ₹80] + 0.08 Ke = 0.027 + 0.08 Ke = 0.107 or 10.7%

Topics: Cost of Capital

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