Question

J & K Ltd. Provided the following information related to the book values of debentures and
equity
Equity Share Capital
40,00.000
12% Preference shares
10,00,000
10% Debentures
30,00,000
The equity share of the company sells for Rs. 20 and company has taken decision of providing
dividend of Rs 2 per equity share. The dividend will further grow at 5% forever. Tax rate is 35%. You
are required to compute weighted average cost of capital (WACC) based on the given information
Company is planning to raise Rs 20,00,000 by issuing 12 % debentures, but then equity share price
will fall to Rs. 16 per share and company has to increase dividend to Rs. 2.40, growth rate remains
unchanged. Do you think this will have some impact on WACC, if Yes, then calculate new WACC and
compare with the previous one.​

Answer 1

Answer:

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