Question

The following is the Krock Ltd. as on 31st March current year. Equity Share: 10000 Share (Rs. 100 FV each) = Rs. 100000 12% Preference Share (of Rs. 100 each) = Rs. 400000 10% Debentures = Rs. 600000 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 declared at the end of the current year. The dividend growth rate is 6 per cent. If the company is in the 35 per cent tax bracket, compute the weighted average cost of capital based on book value weights.

Answer 1

Step-by-step explanation:

Weighted Average Cost of Capital (WACC) = (Weight of Equity x Cost of Equity) + (Weight of Preference Shares x Cost of Preference Shares) + (Weight of Debt x Cost of Debt x (1-Tax Rate))

Weight of Equity = (10000 x 100) / (100000 + 400000 + 600000) = 0.16

Cost of Equity = (Dividend per share / Market Price per share) + Growth Rate

= (10 / 110) + 0.06 = 0.077

Weight of Preference Shares = (400000 / (100000 + 400000 + 600000)) = 0.64

Cost of Preference Shares = 12%

Weight of Debt = (600000 / (100000 + 400000 + 600000)) = 0.20

Cost of Debt = 10%

Weighted Average Cost of Capital (WACC) = (0.16 x 0.077) + (0.64 x 0.12) + (0.20 x 0.10 x (1 - 0.35))

= 0.0123 + 0.0768 + 0.065 = 0.1561 or 15.61%