Business Finance Workouts Examples

1,Cost of capital

 is the minimum required rate of return expected on funds committed to the project.

Its also the required rate of return of return by the providers of funds.

,A company should calculate its cost of capital with care because its very important because it helps in descion making so as to determine which project to be taken.

Ø  B,No change in risk of new project

All projects undertaken by the company must be of the same risk profile

Ø  B,No change in capital structure

The source and mix of financing the new projects is the same as current capital mix the company

2.

Amount of capital at which the components cost of capital changes

Weight of component on the capital structure

Debt

10% interest

3% discount

Floatation cost = 20/1000

                       =  2%

Total cost = 2% + 3% + 10%

         = 15% of the value issued

Cost of debt should be post debt

Thus, if 100% = 15% , what about 70% (less 30% tax)

                     = 10.5%

Preference shares

10% interest

Selling and issuing cost = 4/100

                                    = 4%

Total = 10% + 4%

      = 14% of value issued

Ordinary shares

Dividends = 6/80

                = 7.5%

Under pricing = 4/80

                       = 5%

Floatation Cost = 3/80

                        = 3.75%

Total = 7.5% + 5% + 3.75%

          = 16.25

b) WACC

WACC = (10.5% * 40%) + (14% * 10%) + (16.25% * 50%)

             = 4.2% + 1.4% + 8.125%

             = 13.725%