Question

CP India Ltd has the following capital structure, which it considers optimal: Debt 25% Preference Shares 15% Equity shares 60% Total 100% Applicable tax rate for CPIL is 25%. and investors expect earnings and dividends to grow at a constant rate of 9% in the future. Risk free rate of return is 6%, average equityshare has expected rate of return of 15%. CPIL’s beta is 1.50. Following terms would apply to new securities being issued as follows: 1. New preference can be issued at a face value of Rs. 100 per share, dividend and cost of issuance will be Rs. 8 per share and Rs. 4 per share respectively. 2. Debt will bear an interest rate of 10%. Calculate a. Component cost of debt, preference shares and equity shares assuming that CPIL does not issue any additional equity shares. (5 Marks) b. WACC.

Answer 1

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