Finance Case

Part B:

Mini case 2

Ashok Leyland issued Rs 100 Lakhs 12% Preference shares of Rs. 100 each, redeemable at par after 5 years. Calculate the cost of Preference shares in each of the following cases. (Dividend distribution tax being 20%).

Here D= 12, Nm= 5 and RV= 100 for all cases

Cost of redeemable preference share= [D + (f/Nm)]/ [( RV+ SV)/2]

Case (a) If Preference shares are issued at par with no floatation cost.

f= 0, RV= SV

Cp= 12/100 =12%

Case (b) If Preference shares are issued at par with 5% floatation cost.

f= 0.05*100= 5, SV= 95

Cp= [12 + 1]/ [(100+95)/2]

= 13%

Case (c) If Preference shares are issued at 10% premium with 5% floatation cost.

f= 0.05* 110 = 5.5 SV= 110 – 5.5 =104.5

Cp= [12+ 1.1]/ [(100+ 104.5)/2]

= 12.8%

Case (d) If Preference shares are issued at 10% discount with 5% floatation cost.

f= .05*90= 4.5 , SV = 90-4.5= 85.5

Cp= [12+ 0.9]/[(100+85.5)/2]

=13.9%

Mini Case 3

Ashok Leyland issued Rs 100 Lakhs 12% Preference shares of Rs. 100 each, redeemable at premium of 5% after 5 years. Calculate the cost of Preference shares in each of the following cases. (Dividend distribution tax being 20%).

Case (a) If Preference shares are issued at par with no floatation cost.

Annual Dividend D= 12

Redeemable value RV= 105

Sales value SV= 100

Number of years for redemption N= 5

Cost of preference share kp = D+(RV-SV)/N

(RV+SV)/2

kp = [12+(105-100)/5]÷[(105+100)/2]

= 12.683%

Case (b) If Preference shares are issued at par with 5% floatation cost.

Annual Dividend D= 12

Redeemable value RV= 105

Sales value SV= 100(1-0.05)=95

Number of years for redemption N= 5

Cost of preference share kp = D+(RV-SV)/N

(RV+SV)/2

kp = [12+(105-95)/5]÷[(105+95)/2]

= 13.659%

Case (c) If Preference shares are issued at 10% premium with 5% floatation cost.

Annual Dividend D= 12

Redeemable value RV= 105

Sales value SV= 110(1-0.05) = 104.5

Number of years for redemption N= 5

Cost...