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Corporate Finance Submitted To: Prof. Kuldeep

1. The document discusses various methods of calculating the cost of capital for a corporation, including cost of debt, preferred shares, equity shares, and term loans. 2. It provides formulas for calculating the post-tax cost of different types of debt issued at par, premium, or discount. It also provides formulas for calculating costs of redeemable and irredeemable preferred shares. 3. Methods for calculating cost of equity like the earnings/price model, dividend growth model, and retained earnings model are described. The weighted average cost of capital is defined as the weighted average of the costs of all sources of financing.

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Chirag Chandan
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54 views26 pages

Corporate Finance Submitted To: Prof. Kuldeep

1. The document discusses various methods of calculating the cost of capital for a corporation, including cost of debt, preferred shares, equity shares, and term loans. 2. It provides formulas for calculating the post-tax cost of different types of debt issued at par, premium, or discount. It also provides formulas for calculating costs of redeemable and irredeemable preferred shares. 3. Methods for calculating cost of equity like the earnings/price model, dividend growth model, and retained earnings model are described. The weighted average cost of capital is defined as the weighted average of the costs of all sources of financing.

Uploaded by

Chirag Chandan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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CORPORATE FINANCE

SUBMITTED TO : PROF. KULDEEP


Sneha Chandan (06) Ruchit Vora (59) ANIK SHAH (46)

Himani Jain (21) Sanket Jain (18)

SANKESt KOTHARI(28)
Cost of Capital

 The cost of raising funds is the


firm’s cost of capital.
 For Investors the rate of return on a
security is a benefit of investing.
 For Financial Managers that same
rate of return is a cost of raising
funds that are needed to operate the
firm.
How can the firm raise
capital?

 Debentures
 Preference Stock
 Equity shares
Cost of
Debt
Cost of Debt

Cost of capital can be examine under following


possibilities.
 Redeemable debt issued at a par, premium or
at a discount
 Perpetual Debt
1. Redeemable debt issued at a
par, discount or premium

a. If debt issued at par


Ki = r
Kd= r (1-t)
Where,
Ki= before tax
r = Interest rate payable
t = Marginal tax rate of the firm
b. If debt issued at premium and discount

Kd= [I(1-T) + {(F-P)/n}


(F+P)/2
Where,
Kd= is post tax cost of debenture capital
I = is the annual interest payment per unit of debenture
F = is the redemption price per debenture
P = is the net amount realized per debenture
n = is maturity period
Cost of
Preference
Shares
Cost of capital can be examine under
following possibilities

1. Cost of capital of irredeemable (Perpetual)


preference share
2. Cost of capital of redeemable preference
share
Cost of Preference Share

1. Cost of capital of irredeemable (Perpetual)


preference share

Kp= D
P
Where,
D= Annual dividend payable
P= Face value of preference shares/ net proceeds of
the preference shares issue
2. Cost of capital of redeemable preference share

a. If Preference share issued at par

Kp= D
P
Where,
D= Annual dividend payable
P= Face value of preference shares/ net proceeds of the
preference shares issue
b. If Preference share issued at premium and discount

Kp= D+{(F-P)/n}
(F+P)/2
Where,
Kp= is the cost of pref. capital
D= is the pref.dividend per share payable
F=is the redemption price
P= is the net proceeds per share
n = is the maturity period
Cost of
Equity
share
Cost of Equity Share

There are various methods of computing cost of


equity.
 Earnings/ price model
 Dividend growth model
 Retained earnings model
1.Earnings/price model

Ke=[(EPS/DPS)*100]+G
Where,
E= Earnings per share
P= Current market price per share
G=Growth rate
2.Dividend growth model

Ke=D + g
P
Where,
D= Dividend per share at the end of a period
P= Current market price
g= Growth rate in dividend
Cost of Retained Earnings

Kr= Ke (1-t)(1-C)

Where,

Ke =Cost of equity share capital


t = Marginal tax rate applicable to the shareholders
C= Commission, brokerage, etc. expressed as a
percentage
Cost of
Term
Loans
Kt = I (1-T)
Where, I = is interest
T = is tax rate
Weighted
Average Cost
of Capital
Weighted Cost of Capital

The weighted cost of capital is just


the weighted average cost of all of
the financing sources.
FORMULA:
Ke = D/P + g
ASSUMPTIONS OF
WACC
RISK –RETURN
ANALYSIS

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