The following information pertain to CMC Limited: Number of Equity Shares 20,00,000 Book Value of 10% Convertible Debentures 1,00,00,000 Book Value…

CA Intermediate · Financial Management and Strategic Management · PYQS · January 2025
The following information pertain to CMC Limited: Number of Equity Shares 20,00,000 Book Value of 10% Convertible Debentures 1,00,00,000 Book Value of 12% Bank Term Loan 25,00,000 Market Price of Equity Share 55 Market Value of 10% Convertible Debenture 108 Face Value of Equity Share 10 Face Value of 10% Convertible Debenture 100 Beta coefficient of Equity shares of CMC Ltd. 1.5 Risk free rate of return 4.5% Equity risk Premium 9% Rate of taxation 30% The company expects that the share prices will rise in future at an average rate of 6% per annum. The 10% convertible debentures of 100 each will be converted in six years' time into equity shares of the company in the ratio of 1: 4 (4 equity shares for each debenture). The market value of 12% bank term loan is at par. You are required to calculate: (i) Cost of Equity Share Capital by applying Capital Asset Pricing Model (CAPM) Approach (ii) Cost of Convertible Debenture by using approximation method, (iii) Cost of Bank Term Loan (iv) Weighted Average Cost of Capital using Market Value weights

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(i) Cost of equity share R F = 4.5% R m - R f = 9% β = 1.5 Using CAPM, K e = R f + β (R m – R f ) = 4.5% + 1.5 (9%) = 18% (ii) Cost of convertible debenture (based on Market Value) Price of share after 6 years = 55 (1+0.06) 6 = 78.018 Redemption Value of Debenture (RV) = 78.018 × 4 = 312.07 (RV) NP = 108 (MV) n = 6 K d = [INT(1-t) + (RV-NP)/n] / [(RV+NP)/2] × 100 = [10 (1-0.3) + (312.07-108)/6] / [(312.07+108)/2] × 100 = [7 + 34.012] / 210.035 × 100 K d = 19.52% (iii) Cost of bank term loan K d = I (1-t) = 12% (1-0.3) = 8.4% (iv) Calculation of Weighted Average Cost of Capital (WACC) using Market Value Weights Source ₹ in lakhs Weight Cost of Capital after tax WACC Equity Share Capital 11,00,00,000 0.892 0.180 0.1606 10% Convertible Debenture 1,08,00,000 0.088 0.195 0.0171 12% Bank Term Loan 25,00,000 0.020 0.084 0.0017 Total 12,33,00,000 1 0.1794 WACC = 17.94% Alternative Solution to Part (ii) and (iv) (ii) Cost of convertible debenture Price of share after 6 years = 55 (1+0.06) 6 = 78.018 Redemption Value of Debenture (RV) = 78.018 × 4 = 312.07 (RV) NP = 100 n = 6 K d = [INT(1-t) + (RV-NP)/n] / [(RV+NP)/2] × 100 = [10 (1-0.3) + (312.07-100)/6] / [(312.07 +100)/2] × 100 = [7 + 35.345] / 206.035 × 100 K d = 20.55% (iv) Calculation of Weighted Average Cost of Capital (WACC) using Market Value Weights Source ₹ in lakhs Weight Cost of Capital after tax WACC Equity Share Capital 11,00,00,000 0.892 0.180 0.1606 10% Convertible Debenture 1,08,00,000 0.088 0.205 0.0180 12% Bank Term Loan 25,00,000 0.020 0.084 0.0017 Total 12,33,00,000 1 0.1803 WACC = 18.03%

Topics: Part-A: Financial Management

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