Zoya Ltd. has obtained capital from the following sources and the specific costs are given against them: Type of capital Book value (in lakh) Market value (in lakh) Cost of capital (%) Debentures 4 3.8 5 Preference share

CS Professional · Financial, Treasury and Forex Management · PYQS · June 2016
Zoya Ltd. has obtained capital from the following sources and the specific costs are given against them: Type of capital Book value (in lakh) Market value (in lakh) Cost of capital (%) Debentures 4 3.8 5 Preference shares 1 1.1 8 Equity shares 6 9.0 13 Retained earnings 2 3.0 9 Total 13 16.9 You are required to calculate weighted average cost of capital using (i) Book value weight; and (ii) Market value weight.

Answer & Explanation:

(i) Calculation of WACC using book value weights Source of capital Amount (W) Cost (X) Weighted cost (XW) Debentures 4,00,000 0.05 20,000 Preference shares 1,00,000 0.08 8,000 Equity shares 6,00,000 0.13 78,000 Retained earnings 2,00,000 0.09 18,000 ΣW 13,00,000 ΣXW 1,24,000 WACC = ΣXW / ΣW * 100 = 1,24,000 / 13,00,000 * 100 = 9.54% (ii) Calculation of WACC using market value weights Source of capital Amount (W) Cost (X) Weighted cost (XW) Debentures 3,80,000 0.05 19,000 Preference shares 1,10,000 0.08 8,800 Equity shares 9,00,000 0.13 1,17,000 Retained earnings 3,00,000 0.09 27,000 ΣW 16,90,000 ΣXW 1,71,800 WACC = ΣXW / ΣW * 100 = 1,71,800 / 16,90,000 * 100 = 10.17%

Topics: Cost of Capital

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