A company offers for public subscription equity shares of Rs. 10 each at
a premium of 10%. The company pays 5% of the issue price as underwriting
commission. The rate of dividend expected by the equity shareholders is
20%. You are required to calculate the cost of equity capital. Will your cost of
equity capital be different if it is to be calculated on the present market value
of the equity share, which is Rs. 15?

To calculate the **cost of equity capital**, we need to consider two different scenarios: first, the cost of equity based on the issue price, and then the cost of equity based on the market value of the equity share. 

### 1. **Cost of Equity Based on Issue Price**

The formula to calculate the cost of equity capital is:

\[
\text{Cost of Equity (Ke)} = \frac{\text{Dividend}}{\text{Net Proceeds}} \times 100
\]

Where:
- Dividend = Expected dividend rate
- Net Proceeds = Issue price of the share - Underwriting commission

Let's calculate step by step.

#### a. **Issue Price** of the share:
- The face value of the share = Rs. 10
- Premium = 10% of Rs. 10 = Rs. 1
- Therefore, the issue price = Rs. 10 + Rs. 1 = Rs. 11

#### b. **Underwriting Commission**:
- Commission = 5% of the issue price
- 5% of Rs. 11 = Rs. 0.55
- Therefore, the net proceeds = Rs. 11 - Rs. 0.55 = Rs. 10.45

#### c. **Expected Dividend**:
- Dividend expected = 20% of the face value
- 20% of Rs. 10 = Rs. 2

Now, we can calculate the cost of equity based on the issue price:

\[
\text{Cost of Equity (Ke)} = \frac{2}{10.45} \times 100 = 19.14\%
\]

### 2. **Cost of Equity Based on Market Value**

If the cost of equity is calculated based on the market value, the formula remains the same, but the **market price** of Rs. 15 is used instead of the net proceeds.

\[
\text{Cost of Equity (Ke)} = \frac{2}{15} \times 100 = 13.33\%
\]

### Conclusion:
- The cost of equity based on the **issue price** is **19.14%**.
- The cost of equity based on the **market value** is **13.33%**.

Yes, the cost of equity capital would be **different** when calculated based on the present market value compared to the issue price.

---

Would you like to explore any of the calculations in more detail or have any questions?

### 5 Related Questions:
1. How does the premium on shares affect the overall cost of equity?
2. What would happen to the cost of equity if the dividend expectation changes?
3. How do underwriting commissions impact the net proceeds in a share issue?
4. What is the relationship between market value and cost of equity capital?
5. How do changes in market value affect shareholder return?

**Tip:** In practice, using market value is often considered more accurate for calculating the cost of equity, as it reflects the current value of the stock to investors.

A company offers for public subscription equity shares of Rs. 10 each at a premium of 10%. The company pays 5% of the issue price as underwriting commission. The rate of dividend expected by the equity shareholders is 20%. You are required to calculate the cost of equity capital. Will your cost of equity capital be different if it is to be calculated on the present market value of the equity share, which is Rs. 15?

Learn how to calculate the cost of equity capital based on both the issue price and the market value of shares. This problem involves concepts like dividend expectations, underwriting commissions, and market value, suitable for finance students at an undergraduate or graduate level.

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