Question 2 (a) Capital structure of B Ltd. for year ended 31st March, 2025: Equity share capital @₹10 each = ₹14,00,000 10% Preference share capital @₹1,000 each = ₹10,00,000 Debenture @₹100 each = ₹9,60,000 Bank Loan = ₹6,40,000 Risk-free rate = 14%, Market rate = 19%, Beta = 1.20 10% Preference shares redeemable at ₹1,065.40 after 3 years. Interest on bank loan = 1.30 times interest on debentures. Debentures redeemable at par after 5 years. Flotation cost = ₹4 per debenture. Tax rate = 30%. Cost of capital = 14%. Calculate: (i) Cost of Equity, (ii) Cost of Preference Share (YTM method), (iii) Post-tax cost of debenture (approximation method), (iv) Interest rate of bank loan. (1+2+3+2 = 8 Marks) (b) H Ltd.: EPS = ₹3.00, ROI = 20%, Cost of equity = 15%. As per Walter's Model, what is the maximum and minimum price of share? (2 Marks)

## Part (a): Cost of Capital — B Ltd. **Total Capital:** --- **(i) Cost of Equity (Ke) — CAPM** \K_e = R_f + \$\displaystyle \beta$(R_m - R_f) \ \$$K_e = 14\\% + 1.20 \$$$\displaystyle \times$ (19\\% - 14\\%) = 14\\% + 6\\% = \\boxed{20\\%} \ --- **(ii) Cost of Preference Shares (YTM / IRR Method)** Face Value = ₹1,000, Annual Dividend = 10% × 1,000 = ₹100, Redeemable at ₹1,065.40 after 3 years. Current Market Price = ₹1,000 (assumed at par/issue price). Calculate NPV at 10% and 14%: \$$\$$$\displaystyle \text{IRR} = 10$\\% + \$\displaystyle \frac{48.82}{48.82 + 48.66}$ \$\displaystyle \times$ (14\\% - 10\\%) \ \$$= 10\\% + \$$$\displaystyle \frac{48.82}{97.48}$ \$\displaystyle \times$ 4\\% = 10\\% + 2\\% = \\boxed{12\\%} \ **Cost of Preference Shares (Kp) = 12%** --- **(iii) Post-Tax Cost of Debentures (Approximation Method)** NP (Net Proceeds) = ₹100 − ₹4 (flotation) = ₹96; RV = ₹100; n = 5 years. Let interest rate on debentures = X, so annual interest = 100X. Interest on bank loan = 1.3X (pre-tax). Using WACC = 14% to find X: \\$\displaystyle \text{Kd}$ = \$\displaystyle \frac{I(1-t) + \\frac{RV - NP}{n}}{\\frac{RV + NP}{2}}$ = \$\displaystyle \frac{100X(0.7) + \\frac{4}{5}}{\\frac{196}{2}}$ = \$\displaystyle \frac{70X + 0.8}{98}$ \ \\$\displaystyle \text{Kd(Bank Loan)} = 1$.3X \$\displaystyle \times$ (1 - 0.3) = 0.91X \ Setting up WACC equation: \$\displaystyle \times$ 0.91X \̲" style="color:#cc0000">0.14 = 0.35(0.20) + 0.25(0.12) + 0.24 \$\displaystyle \times$ \$\displaystyle \frac{70X + 0.8}{98} + 0$.16 \$\displaystyle \times$ 0.91X \ \0.14 = 0.07 + 0.03 + \$\displaystyle \frac{16.8X + 0.192}{98} + 0$.1456X \ \0.04 = \$\displaystyle \frac{16.8X + 0.192}{98} + 0$.1456X \ \0.04 \$\displaystyle \times$ 98 = 16.8X + 0.192 + 14.2688X \ \3.92 - 0.192 = 31.0688X \ \$$3.728 = 31.0688X \\Rightarrow X = 0.12 \$$$\displaystyle \text{ or }$ 12\\% \ So, interest rate on debentures = **12%**. \K_d = \$\displaystyle \frac{12(1 - 0.3) + \\frac{4}{5}}{\\frac{196}{2}}$ = \$\displaystyle \frac{8.4 + 0.8}{98}$ = \$\displaystyle \frac{9.2}{98}$ = \\boxed{9.39\\%} \ **Post-tax cost of debentures ≈ 9.39%** --- **(iv) Interest Rate of Bank Loan** \$$\$$$\displaystyle \text{Interest rate on bank loan} = 1$.3 \$\displaystyle \times$ X = 1.3 \$\displaystyle \times$ 12\\% = \\boxed{15.60\\%} \ --- ## Part (b): Walter's Model — H Ltd. **Given:** EPS (E) = ₹3, r = 20%, Ke = 15% Since **r (20%) > Ke (15%)**, the firm is a **growth firm**. As per Walter's Model, value is maximised by retaining all earnings (D = 0) and minimised by distributing all earnings (D = E). **Walter's Formula:** \P = \$\displaystyle \frac{D + \\frac{r}{K_e}(E - D)}{K_e}$ \ **(i) Maximum Price — when D = 0 (full retention):** \P_{max} = \$\displaystyle \frac{0 + \\frac{0.20}{0.15}(3 - 0)}{0.15}$ = \$\displaystyle \frac{\\frac{0.20}{0.15} \\times 3}{0.15}$ = \$\displaystyle \frac{4}{0.15}$ = \\boxed{₹26.67} \ **(ii) Minimum Price — when D = E = ₹3 (full distribution):** \P_{min} = \$\displaystyle \frac{3 + \\frac{0.20}{0.15}(3 - 3)}{0.15}$ = \$\displaystyle \frac{3}{0.15}$ = \\boxed{₹20} \ **Maximum Price = ₹26.67 | Minimum Price = ₹20**