Capital structure of B Ltd. for the year ended 31 st March, 2025 are as follows: Particulars Amount (₹) Equity share capital @10 each 14,00,000 10%…

CA Intermediate · Financial Management and Strategic Management · PYQS · May 2025
Capital structure of B Ltd. for the year ended 31 st March, 2025 are as follows: Particulars Amount (₹) Equity share capital @10 each 14,00,000 10% Preference share capital @1,000 each 10,00,000 Debenture @100 each 9,60,000 Bank Loan 6,40,000 Risk-free rate of return is 14%, Market rate of return is 19% and beta of company is 1.20.10% Preference shares are redeemable at 1,065.40 after 3 years.Interest on bank loan is 1.30 times of interest on debentures.Debentures are redeemable at par after 5 years. Floatation cost is 4 per debenture.Tax rate is 30%. Cost of capital is 14%. You are required to calculate the following: (i) Cost of Equity. (ii) Cost of preference share using YTM method. (iii) Post-tax cost of debenture using approximation method. (iv) Interest rate of bank loan. PV factors @ 10% and 14% Year 1 2 3 4 PVIF 0.10, t 0.909 0.826 0.751 0.683 PVIF 0.14, t 0.877 0.769 0.675 0.592

Suggested Answer and Working Notes:

Answer (a) (i) Calculation of Cost of Equity K e = R f + β (R m – R f ) = 14% + 1.2 (19% - 14%) = 20% (ii) Calculation of Cost of Preference Shares: Current Market Price P 0 = Preference Dividend (PD) X PVAF (r,14) + Redeemable Value (RV) X PVIF (r,14) Or 1000 = 100 × PVAF (r, 14) + 1065.4 x (r,14) Calculation of NPV at discount rate of 10% and 14% Year Cash Flows (₹) PVF @10% PV (₹) PVF @ 14% PV (₹) 0 (1000) 1 (1000) 1 (1000) 1-3 100 2.487 248.70 2.322 232.20 3 1065.4 0.751 800.12 0.675 719.14 +48.82 -48.66 IRR = 10% + 48.82 48.82-(-48.66) x (14% - 10%) = 10% + 48.82 97.48 x 4% = 10% + 2% = 12% (iii) Calculation of Post-tax Cost of Convertible Debentures: Working Note: Calculation of Interest rate on Bank term Loan & Debentures Let the rate of interest on debentures be 'X' Therefore, Rate of Interest on bank loan = 1.3X x (0.7) = 0.91X K d (Debentures) = I(1-t)+ (RV-NP) n (RV+NP) 2 = 100 X(1-0.3)+ (100-96) 5 (100+96) 2 = 70 X+0.8 98 Sources of capital Amount of capital Weights (W) Cost (K) W x K Equity share capital 14,00,000 0.35 0.20 0.07 Preference share capital 10,00,000 0.25 0.12 0.03 Debentures 9,60,000 0.24 70 X+ 0.8 98 16.8X + 0.192 98 Bank Loan 6,40,000 0.16 0.91X 0.16 x 0.91X 40,00,000 1.00 0.14 0.14 = 0.07 + 0.03 + 16.8X+0.192 98 + 0.16x(0.91X) 0.04 x 98 = 16.8 X +0.192 + 14.2688 X 3.728 = 31.0688X X = 0.1199 or 12 % So, interest on debentures = 12 % K d (Debentures) = I(1-t)+ (RV-NP) n (RV+NP) 2 = 12(1-0.3)+ (100-96) 5 (100+96) 2 = 8.4+0.8 98 = 9.387% or 9.39% (iv) Interest Rate of bank loan = 12 x 1.3 = 15.60%

Topics: Part-A: Financial Management

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