he following are the detail of capital structure of Peru Ltd, the CFO has estimated
the interest rate on debt and cost of equity at various levels of leverage.
Leverage Coupon Rate Cost of Equity
0 8 12
10 8 12
20 9 12.5
30 9 13.5
40 10 14.5
50 13 16
60 15 20
70 18 25
The debt is 10-year redeemable bond at par Rs 1000 with coupon rate varying as per
debt equity ratio. Peru Ltd always keeps 10 per cent of its finances in the form of
preference shares carrying 2 per cent extra return compared to its Bond coupon rates.
The duration of preference shares and bonds are similar. Assuming 17.5 per centdividend distribution tax and 35 per cent corporate tax estimate the optimal capital
structure for Peru Ltd.
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