1.     Susheel Corporation has the following book value capital structure:

1.    

Susheel Corporation has the following book value capital structure:

Equity Capital (10 million shares, Rs.10 par)                                             Rs. 100 million

Preference Capital (11 percent, 1, 00,000 shares at Rs.100 par)       Rs.10 million

Retained Earnings                                                                                                Rs. 120 million

Debentures (13.5 percent, 5,00,000 debentures Rs.100 par)             Rs.50 million

Term Loans 12 percent                                                                                Rs.80 million

Total                                                                                                         Rs.360 million

The next expected dividend per share is Rs.1.50. The dividend per share is expected to grow at the rate of 7 percent. The market price per share is Rs. 20.

Preference stock redeemable after 10 years is currently selling for Rs.75 per share.

Debentures, redeemable after 6 years are currently selling for Rs.80 per debenture.

The tax rate for the company is assumed to be 50 percent.

 Calculate

1.     Cost of equity using dividend growth model (ke)

2.    
Cost of debt( kd) ,  Cost of Preference shares  (Kp)

3.    
Overall cost of capital (Ko) using Book value and Market value proportions.

 

Note: For calculation of Overall cost of capital (Ko) use Post tax cost of debt (kd), Post tax cost of term loan, Pre tax Cost of Preference share (kp) and Pretax Cost of equity (Ke)