The following is capital structure of a firm : Source of Finance Amount (₹) After Tax Cost (%) Equity (paid-up) share capital 20,00,000 20 Retained earnings (Reserves) 40,00,000 20 Preference share capital 15,00,000 10 D

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2018
The following is capital structure of a firm : Source of Finance Amount (₹) After Tax Cost (%) Equity (paid-up) share capital 20,00,000 20 Retained earnings (Reserves) 40,00,000 20 Preference share capital 15,00,000 10 Debt 25,00,000 8 Total 1,00,00,000 Compute the weighted average cost of capital of the firm, based on the existing capital structure.

Answer & Explanation:

Weighted average cost of capital based on existing capital structure Source Amount (₹) Proportion After tax cost Weighted cost Equity capital 20,00,000 0.20 0.20 0.04 Retained earnings 40,00,000 0.40 0.20 0.08 Preference share 15,00,000 0.15 0.10 0.015 Debt 25,00,000 0.25 0.08 0.02 Total 1,00,00,000 1.00 0.155 Weighted average cost of capital = 0.155 or 15.5%

Topics: Cost of Capital

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