question archive 6) Flag products Ltd have been maintaining a capital structure based on market value proportions of 25:15:60 for debt, preference and equity capital which it believes is optimal
6) Flag products Ltd have been maintaining a capital structure based on market value proportions of 25:15:60 for debt, preference and equity capital which it believes is optimal
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6) Flag products Ltd have been maintaining a capital structure based on market value proportions of 25:15:60 for debt, preference and equity capital which it believes is optimal. The 10 % debt of FPL is selling at 20 % discount to the face value and the 12 % preference share is selling at par. FPL growing at 15% per annum had paid the dividend of Rs 4 per share in the previous year, and its share of face value of Rs10 is trading at Rs 60. Flag Products Ltd has a reserve of Rs 25 per share. The corporate tax payable by the firm is 40% what is the WACC for FPL based on book value and Market value weights? (oup /343/13-7 } ( kd=7.50 %; kp=12.00 % ; ke= 22.67% ; wacc using mkt value =17.277 % ; using book value :14.856 % )
7. A company's shares with a face value of Rs. 10 each are quoted at Rs. 50 in the stock market. Current rate of dividend is 50% and this is expected to grow at a steady rate of 5% p.a. Calculate the cost of equity capital of the company. (RMK /320/9.3); Ans (15%).
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qs 7)
g = ROE * Retention ratio
5% = ROE * 50%
ROE = 5% / 50 % = 10%
ROE = EPS / P0
10% = EPS / 50
EPS = 10% * 50 = 5
D0 = 5 * 50% = 2.5
D1 = 2.5 *(1 + 5%) = 2.625
Cost of Equity =
P0 = D1 / ( Re - g)
Re - g = D1 / P0
Re = D1 / P0 + g
Re = (2.625 / 50 ) + 5%
Re = 10.25 %
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