Match the items of the following two lists and suggest the correct code : Codes : a b c dList – I List – II a. Realised yield method i. Cost of equity share capital b. Taxation ii. Cost of equity capital c. Cost of total capital employed iii. Cost of debt capital d. Dividend growth is a consideration iv. Weighted cost of capital
ii iii iv i
The realised yield method estimates the cost of equity capital from the returns shareholders have actually realised in the past (dividends received plus the price at which the shares could be sold), on the assumption that the past yield is what investors expect in future: a matches with ii.
Taxation affects the cost of debt capital, because interest on debt is a tax-deductible expense. The after-tax cost of debt is the interest rate multiplied by one minus the tax rate, which makes debt the cheapest source: b matches with iii.
The cost of the total capital employed is the overall cost of all sources together, calculated by weighting the specific cost of each source by its proportion in the capital mix. This is the weighted cost of capital: c matches with iv.
Dividend growth is a consideration in the dividend growth (Gordon) approach to the cost of equity share capital, where the cost equals the expected dividend yield plus the growth rate of dividends: d matches with i.
The correct code is a-ii, b-iii, c-iv, d-i.
Hence, ii iii iv i.
Similar Questions
A company has issued 10 percent perpetual debt of ₹ 1 lac at 5 percent premium. If tax rate is 30 percent, then the cost of debt will be :
Indicate the cost of equity capital, based on capital asset pricing model, with the following information :
Beta coefficient – 1.40
Risk-free rate of interest – 9%
Expected Rate of Return on equity in the market – 16%
Assertion (A) : Weighted average cost of capital should be used as a hurdle rate for accepting or rejecting a capital budgeting proposal.
Reason (R) : It is because by financing in the proportions specified and accepting the project, yielding more than the weighted average required return, the firm is able to increase the market price of its stock.
Codes :
From investor’s point of view, the cost of capital is :
Important Questions from Cost of Capital
A company has 10% perpetual debt of Rs. 1,00,000. The tax rate is 35%. Which one of the following is the after-tax cost of capital assuming that the debt is issued at 10% premium?
Company's current price of share is Rs. 60 and dividend per share is Rs. 4 . If its capitalisation rate is 12 percents. What is dividend growth rate?
X Ltd. forfeited 40 shares of Rs. 10 each and on which Rs. 4 per share were paid. If the forfeited shares reissued as Rs. 8 per share paid up, what is the minimum price the company must charge?
Which of the sources of finance has an implicit cost of capital?
Cost of Equity Share Capital is more than cost of Debt because :
