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MARKS 30

Assignment # 02

Last Date Jul 21, 2014




Assignment Question:
Seasons Corporation is a listed company which produces cooking oil. Now the company has
an intention to introduce its new product range of “Frozen items” in the market. For this
purpose a new plant is required. This project will require a lot of funds. Company has a plan
to finance it by issuing bonds and stocks in the following manner:

1. Bonds issued to five companies:
Company Book value of
Bond (Rs.)
YTM (%)
KK Company 1,500,000 6.5
Allied Company 1,000,000 6
N&T Technologies 2,000,000 8
Ziema Company 2,5000,00 7.5
Aazam Textile Company 3,000.000 5

2. Common stock:
65,000 common shares issued at Rs.100 per share. Current market price of common stock is
Rs.102 per share. Divided per common share in current year is Rs.5. Growth rate is 10%.

3. Preferred stock:
100,000 preferred stocks at par value of Rs.35 per share and market value of
preferred stock is Rs.3,500,000. Dividend per preferred share is Rs.3.2.
Income tax rate is 30%.

Required:
As a financial manager of the company, you are required to calculate:
1. After-tax cost of debt
2. Cost of equity
3. Cost of preferred stock
4. Weighted Average Cost of Capital (WACC)

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------------------------< BEST OF LUCK >------------------------

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Replies to This Discussion

please upload random solution for better understanding

formula likh kar try to karo. mara kuch our aeya hai 15 se uppar upar Re and Rd ka interest rate kaise aee ga. Jaldi se batain.

any body any idea??????

formula for part 1=total cost of debt*(1-tax rate)

formula for part 2=   

Cost of Equity = (Next Year's Annual Dividend / Current Stock Price) + Dividend Growth Rate

formula for part 3= 

Cost of Preferred Stock =Annual Dividend on Preferred Stock/Current Market Price of Preferred Stock

formula for part 4= .5*total cost of equity+.5*cost of debt*1-tax rate

total cost of equity will be obtained by adding both the cost of common stock and preferred stock and cost of debt will be the value which is calculated in part 1.

Good Luck

correction

the cost of debt will not the one which is calculated in q 1 rather it will be 33% 

Please explain in connection with question and detailed provided.Thanks.

how to find the total cost of debt??

plz share the solution

how to find the total cost of debt??

cost of equity
Cost of Equity = (Next Year's Annual Dividend / Current Stock Price) + Dividend Growth Rate

5 + 10% = 5.1

5.1 / 102 + 0.1 =0.15 cost of equity

this is right

Cost of Preferred Stock =Annual Dividend on Preferred Stock/Current Market Price of Preferred Stock

3.2/ 3500000 = 9.14

this is right

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