X Ltd. has furnished the following information: Earnings per share (EPS) ₹8, Dividend payout ratio 25%, Market price per share ₹80, Tax rate 30%, Growth rate of dividend 8%. The company wants to raise additional capital

Answer 2A (iii) Cost of Equity K e = D/P o + g = (8 * 0.25) / 80 + 0.08 = 2/80 + 0.08 = 0.025 + 0.08 = 0.105 or 10.5% Cost of 10% Debt K d = Interest (1-t) = 0.10(1-0.3) = 0.07 or 7% Cost of 15% Debt K d = Interest (1-t) = 0.15 (1-0.3) = 0.105 or 10.5% Calculation of weighted average cost of capital Type of capital Amount (₹) Weight (w) Cost of capital (k) (w)*(k) Equity 6,00,000 0.6 0.105 0.063 10% Debt 2,00,000 0.2 0.07 0.014 15% Debt 2,00,000 0.2 0.105 0.021 Total 10,00,000 1.0 0.098 Weighted average cost of capital = 0.098 or 9.8%