ABC Ltd. has furnished the following information : Earning per share ₹4 Dividend payout ratio 25% Market price per share ₹50 Rate of tax 40% Growth rate of dividend 10% p.a. The company wants to raise additional capital

(i) Cost of Equity Share Capital (K e ) Dividend per share ($D_1$) = EPS * Payout Ratio * (1 + Growth Rate) $D_1 = ₹4 \times 25\% \times (1 + 0.10) = ₹1 \times 1.10 = ₹1.10$ $K_e = (D_1 / P_0) + g$ $K_e = (₹1.10 / ₹50) + 0.10$ $K_e = 0.022 + 0.10 = 0.122$ or 12.2% (ii) Cost of Debt (K d ) Total Debt to be raised = ₹4,00,000 Interest on first ₹2,00,000 @ 10% = ₹20,000 Interest on next ₹2,00,000 @ 15% = ₹30,000 Total Interest = ₹20,000 + ₹30,000 = ₹50,000 After-tax cost of debt ($K_d$) = (Interest / Net Proceeds) * (1 - Tax Rate) $K_d = (₹50,000 / ₹4,00,000) \times (1 - 0.40)$ $K_d = 0.125 \times 0.60 = 0.075$ or 7.5% (iii) Composite Cost of Capital (WACC) Total additional capital = ₹10,00,000 Debt = ₹4,00,000 Equity = ₹10,00,000 - ₹4,00,000 = ₹6,00,000 Source of capital Amount (₹) Weights Cost of Capital (%) WACC (%) Equity shares 6,00,000 0.60 12.2 7.32 Debt 4,00,000 0.40 7.5 3.00 Total 10,00,000 1.00 10.32