WACC puOgaACHyw

WEIGHTED AVERAGE COST OF CAPITAL / MARGINAL COST OF CAPITAL
1. A company has on its books the following amounts and specific costs of each type of capital.
Type of capital Book value Market value Specific costs (%)

Debt Rs 4,00,000 Rs 3,80,000 5
Preference 1,00,000 1,10,000 8
Equity 6,00,000 15
Retained earnings 2,00,000 12,00,000 13
TOTAL 13,00,000 16,90,000
Determine the weighted average cost of capital using (a) Book value weights and, (b) Market value weights.
2. The following is the capital structure of Saras Ltd. as of 31st December 2009
Particulars Rs.
Equity shares- 20,000 shares of Rs. 100 each 20,00,000
10% Preference shares of Rs. 100 each 8,00,000
12% Debentures 12,00,000
Total 40,00,000
The market price of the company's share is Rs. 110, and it is expected that a dividend of Rs.10 per share would be
declar ed after 1 year. The dividend growth rate is 6%. (i) If the company is in the 50% tax bracket, compute the
weighted average cost of capital
(ii) Assuming that to finance an expansion plan, the company intends to borrow a fund of Rs. 20 lakhs bearing a 14%
rate of interest, what will be the company's revised weighted average cost of capital? This financing decision is
expected to increase the dividend from Rs. 10 to Rs. 12 per share. However, the market price of equity shares is
expected to decline from Rs. 110 to Rs. 105 per share.
3. (i) XYZ Ltd., has the following book value capital structure: (Rs crores)
Equity capital (in shares of Rs 10 each, fully paid up—at par) Rs 15
12% Preference capital (in shares of Rs 100 each, fully paid up—at par) 1
Retained earnings 20
11.5% Debentures (of Rs 100 each) 10
11% Term loans 12.5
The next expected dividend on equity shares per share is Rs 3.60; the dividend per share is expected to grow at the
rate of 7 per cent. The market price per share is Rs 40. Preference stock, redeemable after ten years, is currently
selling at s 75 per share.
Debentures, redeemable after six years, are selling at Rs 80 per debenture.

The Income- tax rate for the company is 40 per cent.
(i) Required:
Calculate the weighted average cost of capital using:
(a) Book value proportions; and
(b) Market value proportions.
4. Aries Limited wishes to raise additional finance of Rs 10 lakh for meeting its investment plans. It has
Rs 2,10,000 in the form of retained earnings available for investment purposes. The following are the further
details:
i. Debt-equity mix, 30:70
ii. Cost of debt: Upto Rs 1,80,000, 10 per cent (before tax); Beyond Rs 1,80,000, 12 per cent (before tax)
iii. Earnings per share, Rs 4
iv. Dividend payout, 50 per cent of earnings
v. Expected growth rate in dividend, 10 per cent
vi. Current market price per share, Rs 44
vii. Tax rate, 35 per cent
You are required:
(a) To determine the pattern for raising the additional finance, assuming the firm intends to maintain the existing
debt/equity mix.
(b) To determine the post-tax average cost of additional debt.
(c) To determine the cost of retained earnings and cost of equity.
(d) Compute the overall weighted average after-tax cost of additional finance.
5. Three companies A, B and C are in the same business and hence have similar operating risks. However,
the capital structure of each of them is different. The following are the details:
A B C
Equity share capital (Rs) 4,00,000 2,50,000 5,00,000
(Face value Rs 10 per share)
Market value per share (Rs) 15 20 12

Dividend per share (Rs) 2.70 4 2.88
Debentures (Rs) Nil 1,00,000 2,50,000
Market value (MV) per debenture (Rs) 125 80
Interest rate 10 8
Assume the current levels of dividends are generally expected to continue indefinitely and the income-tax rate is 35
per cent. You are required to compute the weighted average cost of capital (k0) of each company.
6. As a financial analyst of a large electronics company, you are required to determine the weighted
average cost of capital of the company using (a) book value weights and (b) market value weights. The following
information is available for your perusal.
The company’s present book value capital structure is:

Debentures (Rs 100 per debenture) Rs 8,00,000
Preference shares (Rs 100 per share) 2,00,000
Equity shares (Rs 10 per share) 10,00,000
Total 20,00,000
All these securities are traded in the capital markets. Recent prices are:
Debentures, Rs 110 per debenture, Preference shares, Rs 120 per share, and Equity shares, Rs 22 per Share
Anticipated external financing opportunities are:
(i) Rs 100 per debenture redeemable at par; 10-year maturity, 11 per cent coupon rate, 4 per cent flotation
costs, sale price, Rs 100.
(ii) Rs 100 preference share redeemable at par: 10-year maturity, 12 per cent dividend rate, 5 per cent flotation
costs, sale price, Rs 100.
(iii) Equity shares: Rs 2 per share flotation costs, sale price = Rs 22.
In addition, the dividend expected on the equity share at the end of the year is Rs 2 per share; the anticipated growth
rate in dividends is 7 per cent and the firm has the practice of paying all its earnings in the form of dividends. The
corporate tax rate is 35 per cent.
7. From the following capital structure of XYZ Ltd. determine the appropriate weighted average cost of capital.
Equity shares (1,00,000) Rs 38,00,000

Preference shares 8,00,000
Debentures 50,00,000
Bank loan (long-term) 18,00,000
Bank loan (short-term) 14,00,000
Trade creditors 6,00,000
Additional information:
(i) Equity shares include the existing 60,000 shares having a current market value of Rs 40 per share and the balance
is net proceeds from the new issue in the current year (issue price of the share, Rs 40; flotation cost per share, Rs 5).
The projected EPS and DPS for the current year are Rs 8 and Rs 5 respectively.
(ii) Dividend indicated on preference shares is 12 per cent
(iii) Pre-tax cost of debentures—11 per cent
(iv) Interest on a bank loan—12 per cent (long-term) and 11.5 per cent (short-term).
(v) Corporate tax: 35 per cent. Dividend tax: 10 per cent
(vi) Market value of preference shares is Rs 8,50,000.

WACC puOgaACHyw

Uploaded by

Copyright:

Available Formats

WACC puOgaACHyw

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

WACC puOgaACHyw

Uploaded by

Copyright:

Available Formats

WEIGHTED AVERAGE COST OF CAPITAL / MARGINAL COST OF CAPITAL

Type of capital Book value Market value Specific costs (%)

TOTAL 13,00,000 16,90,000

Debentures, redeemable after six years, are selling at Rs 80 per debenture.

Market value per share (Rs) 15 20 12

The company’s present book value capital structure is:

Equity shares (1,00,000) Rs 38,00,000

You might also like