Page 126 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 5: Cost of Capital

12. A company currently is maintaining 6 per cent rate of growth in dividends. The last year Notes
dividend was 4.5 per share. Equity share holders required rate of return is 15 per cent.
What is the equilibrium price per share?

13. Karvy is planning to sell equity shares. Mr. Ram wishes to invest in Karvy Company by
purchasing equity shares. The company's bond has been yielding at 13 per cent. You are
requested by Mr. Ram to calculate his expected rate of return on equity based on bond
yield plus risk premium approach (assuming 3 per cent as risk premium).
14. Sai Enterprises issued 9 per cent preference share (irredeemable) four years ago. The
preference share that has a face value of 100 is currently selling for 93. What is the cost
of preference share with 8 per cent tax on dividend?
15. Company has 50,000 preference shares of 100 at par outstanding at 11 per cent dividend.
The current market price of the share is 90. What is its cost?

Answers: Self Assessment

1. rate of return 2. percentage
3. capital formation 4. debt

5. Cost of Capital 6. actual profitability
7. marginal 8. Future Cost
9. Spot 10. interest rate

11. discount rate 12. opportunity
13. marginal cost of capital 14. balance sheet
15. composite

5.9 Further Readings

Books Chandra, P., Financial Management - Theory and Practice, New Delhi, Tata McGraw
Hill Publishing Company Ltd., 2002, p. 3.

Dr Pradeep Kumar Sinha, Financial Management, New Delhi, Excel Books, 2009.
Sudhindra Bhat, Financial Management, New Delhi, Excel Books, 2008.
Van Horne, J.C. and Wachowicz, Jr, J.M., Fundamentals of Financial Management,
New Delhi, Prentice Hall of India Pvt. Ltd., 1996, p. 2.

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