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

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2019
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 rate of dividend: 8% Additional need of funds: ₹10,00,000 Additional debt capital as part of total fund requirement: ₹4,00,000 Cost of debt (before tax) - up to ₹2,00,000: 10% Cost of debt (before tax) - beyond ₹2,00,000: 15% Compute from the above information, (iii) Weighted average cost of capital.

Answer & Explanation:

(iii) Weighted Average Cost of Capital (WACC) Total Additional Funds Required = ₹10,00,000 Additional Debt Capital = ₹4,00,000 Additional Equity Capital = Total Funds - Debt Capital = ₹10,00,000 - ₹4,00,000 = ₹6,00,000 Calculation of WACC: Type of Capital Amount (₹) Weight (W) Cost of Capital (K) W x K Equity 6,00,000 0.60 0.107 0.0642 Debt (first ₹2,00,000) 2,00,000 0.20 0.070 0.0140 Debt (next ₹2,00,000) 2,00,000 0.20 0.105 0.0210 Total 10,00,000 1.00 0.0992 Weighted Average Cost of Capital (WACC) = 0.0992 or 9.92%

Topics: Cost of Capital

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