Ajitanad Ltd. has furnished the following information, to work out the weighted average cost of capital of the firm : Earnings per share: ₹8 Dividend pay-out ratio: 25% Market price per share: ₹80 Tax rate: 30% Growth ra

(ii) After-tax Cost of Debt (Kd) Tax rate (t) = 30% Additional need of funds = ₹10,00,000 Additional debt capital = ₹4,00,000 The cost of debt varies based on the amount: Cost of debt (before tax) up to ₹2,00,000 = 10% Cost of debt (before tax) beyond ₹2,00,000 = 15% For the first ₹2,00,000 of debt: Kd1 = Before-tax cost * (1 - t) = 10% * (1 - 0.30) = 10% * 0.70 = 7% For the remaining debt (₹4,00,000 - ₹2,00,000 = ₹2,00,000): Kd2 = Before-tax cost * (1 - t) = 15% * (1 - 0.30) = 15% * 0.70 = 10.5% Since the additional debt capital is ₹4,00,000, it will be split into two tranches with different costs. To calculate the overall after-tax cost of debt for the additional ₹4,00,000: Total Interest (after tax) = (₹2,00,000 * 0.07) + (₹2,00,000 * 0.105) = ₹14,000 + ₹21,000 = ₹35,000 Average After-tax Cost of Debt = Total Interest (after tax) / Total Debt = ₹35,000 / ₹4,00,000 = 0.0875 or 8.75%