Assuming that the firm pays tax at 40%, compute the Weighted Average Cost of Capital from the following: 5,000 Equity shares of ₹100 each ₹5,00,000 10% Preference Shares ₹1,00,000 12% debentures ₹4,00,000 The current mar

CS Professional · Financial, Treasury and Forex Management · PYQS · June 2017
Assuming that the firm pays tax at 40%, compute the Weighted Average Cost of Capital from the following: 5,000 Equity shares of ₹100 each ₹5,00,000 10% Preference Shares ₹1,00,000 12% debentures ₹4,00,000 The current market price of the share is ₹120. The Company is expected to declare a dividend of ₹12 at the end of the current year, with an expected growth rate of 8%. Use book value weights.

Answer & Explanation:

Cost of debt = Interest (1 - tax rate) K d = 0.12 (1 - 0.40) = 0.072 or 7.2% Cost of equity (K e ) = D 1 / P 0 + g = 12 / 120 + 0.08 = 0.18 or 18% Calculation of WACC Source of capital Amount Weight Specific cost (%) WACC (%) Equity share capital 5,00,000 0.5 18 9 10% Preference share capital 1,00,000 0.1 10 1 12% Debentures 4,00,000 0.4 7.2 2.88 Total 10,00,000 1 12.88 Weighted average cost of capital = 12.88%

Topics: Financial Management

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic