The following data pertains to ABC Ltd.: Particulars Amount (₹) Equity Share Capital (1,00,000 nos.) (Market value) 38,00,000 Preference Share Capital (Book value) 8,00,000 Debentures 50,00,000 Additional Information: (i

CS Professional · Financial, Treasury and Forex Management · PYQS · June 2019
The following data pertains to ABC Ltd.: Particulars Amount (₹) Equity Share Capital (1,00,000 nos.) (Market value) 38,00,000 Preference Share Capital (Book value) 8,00,000 Debentures 50,00,000 Additional Information: (i) Equity Share Capital includes the existing 60,000 shares having current market price of ₹40 per share and the balance is net proceeds from the new issue in the current year (issue price of the share is ₹40; floatation cost per share is ₹5). The projected EPS and DPS for the current year are ₹8 and ₹5 respectively. (ii) Dividend on preference shares is 12%. (iii) Cost of debentures (pre-tax) is 11%. (iv) Market value of preference shares is ₹8,50,000. (v) Corporate tax rate is 35% and dividend tax rate is 10%. You are required to compute Weighted Average Cost of Capital (WACC) using market values as weights.

Answer & Explanation:

(i) Determination of cost of specific sources Dividend Growth Rate; g = [EPS - DPS(1+t)] / P₀ = [₹8 - ₹5(1+0.1)] / 40 = 6.25% Cost of Equity (Existing) Kₑ = (D₁/P₀) + g = ₹5/40 + 0.0625 = 18.75% Equity (new issue) = (₹5/35) + 0.0625 = 20.54% (ii) Cost of Preference Shares (Kₚ) = (Total Dividends on preference shares + Dividend tax) / Market Value of Preference Shares = [₹96,000 + ₹9,600] / ₹8,50,000 = 12.42% (iii) Cost of Debentures (K𝒹) = Interest (1-t) = 11 (1-0.35) = 7.15% Alternatively, (₹5,50,000 (1-0.35)) / ₹50,00,000 = 0.0715 = 7.15% Calculation of Weighted Average Cost of Capital Source of Capital Cost Market Value (in ₹) Total Cost (in ₹) Equity Capital (existing) 18.75% 24,00,000 4,50,000 Equity Capital (new) 20.54% 14,00,000 2,87,560 Preference Shares 12.42% 8,50,000 1,05,570 Debentures 7.15% 50,00,000 3,57,500 96,50,000 12,00,630 Weighted Average Cost of Capital K₀ = 12,00,630 / 96,50,000 = 12.44%

Topics: Cost of Capital

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