Fundamentals of Finance Question Banks

The following data were taken from the financial statements of the Dhaulagiri Company for the year 2022. The norms given below are composite industry average on various sources for industry composite data.
The Company is interested in measuring its cost of its specific type of capital as well as its overall capital cost. Current investigations indicate that the following costs would be associated with the sale of debt, preferred stock and common stock. The company has a 40 percent average tax rate.
Debt: It can sell a 10 year, Rs 1,000 par bond with a 9 percent coupon for Rs 970. An underwriting fee of 2 percent of the face value would be incurred in the process.
Preferred stock: 12 percent preferred stock having face value of Rs 100 can be sold for Rs 95. A fee of Rs 5 must be paid to the underwriters.
Common Stock: The company's common stock is currently selling for Rs 500 per share. The company expects to pay a dividend of Rs 50 per share at the end of the current years. Its dividend is expected to grow at a 6 percent per year forever. It is expected that in order to sell the new common stock, it must be underpriced Rs 60 and therefore will reach the market at Rs 440 per share. The company must also pay a Rs 20 per share underwriting fee. The present capital shown below is considered to be optimal.

Component	Amount
Debt	Rs 40,000,000
Preferred stock	Rs 10,000,000
Common Equity	Rs 50,000,000
Total	Rs 100,000,000

As a consultant of the company, please give the answer of the following.
a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained?
b. How much of the equity funding must come from the sale of new stock?
c. Calculate the component cost of:
1. New Debt
2. New preferred stock
3. Retained earnings / internal equity
4. New equity
d. What would be the company's weighted average cost of capital (WACC) if only retained earnings were used to finance additional growth?
e. What is the weighted average cost of capital when Rs 50 million is raised?
f. Briefly explain the uses of WACC.

Read the following information carefully and answer the questions that follow:

The Annapurna Company has Rs 100 million in total assets at the end of 2023. The Company has been growing rapidly during last five years. It has some other good investment opportunities for which it needs additional long-term funds amounted to Rs 50,000,000. The company plans to raise required funds through bonds, preferred stock and common stock. Company has Rs 10,000,000 internal equity to finance new project.

The Company is interested in measuring its cost of its specific type of capital as well as its overall capital cost. Current investigations indicate that the following costs would be associated with the sale of debt, preferred stock and common stock. The company has a 40 percent average tax rate.

Debt: It can sell a 10 year, Rs 1,000 par bond with a 9 percent coupon for Rs 970. An underwriting fee of 2 percent of the face value would be incurred in the process.

Preferred stock: 12 percent preferred stock having face value of Rs 100 can be sold for Rs 95. A fee of Rs 5 must be paid to the underwriters.

Common Stock: The company's common stock is currently selling for Rs 500 per share. The company expects to pay a dividend of Rs 50 per share at the end of the coming years. Its dividend is expected to grow at a 6 percent per year forever. It is expected that in order to sell the new common stock, it must be underpriced Rs 60 and therefore will reach the market at Rs 440 per share. The company must also pay a Rs 20 per share underwriting fee. The present capital shown below is considered to be optimal.

Debt	Rs 40,000,000
Preferred stock	Rs 10,000,000
Common Equity	Rs 50,000,000
Total	Rs 100,000,000

As a consultant of the company, please give the answer of the following.

a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained?
b. How much of the equity funding must come from the sale of new stock?
c. Calculate the component cost of:
1. New Debt
2. New preferred stock
3. Retained earnings / internal equity
4. New equity
d. What would be the company's weighted average cost of capital (WACC) if only retained earnings were used to finance additional growth?
e. What is the weighted average cost of capital when Rs 50 million is raised?
f. Briefly explain the uses of WACC

Fundamentals of Finance

Faculty of Management