Question

Ltd. Has the following book value capital structure:
Equity Capital (Rs. 10 each)
Rs. 15 Crore
12% Preference shares (Rs. 100 each)
Rs. 1 Crore
Retained Earnings
Rs. 20 Crore
11.5% Debentures (Rs. 100 each)
Rs. 10 Crore
11% Term Loan
Rs. 12.5 Crore
The next expected dividend on equity shares is Rs. 3.6 per share, which is expected to grow
at 7%. The market price per share is Rs. 40
Preference stock redeemable after 10 years, is currently selling at Rs 75 per share.
Debentures, redeemable after 6 years, are currently selling at Rs. 80. The income tax rate is
(10)
40%. Calculate WACC using Book value weights, (ii) Market value weights.​

Answer 1

(i) Cost of Debt

[Int + (RV – SV) / N] (1 – t)k

d

(RV + SV) / 2Int=Annual interest to be paid i.e. Rs. 12t=Company’s effective tax rate i.e. 50% or 0.50RV=Redemption value per Debenture i.e. Rs. 110N=Number of years to maturity = 10 yearsSV=

issue price per debenture minus floatation cost i.e. Rs. 95

k

d

=

[12 + (110 – 95) / 10] (1 – .5)

(110 + 95) / 2[12 + 2.5](0.5)7.25=== 7.43%97.5097.50

(ii)Cost of preference capital

k

p

D + (RV – SV) / N(RV + SV) / 2

Where,

D

=

Dividend on Preference share i.e. Rs. 14SV

=

Issue Price per share minus floatation cost Rs. 92

N

=

No. of years for redemption i.e. 12 yearsRV

=

Net price payable on redemption Rs. 100

Prof. K.V. Pavan Kumar,

FINANCIAL MANAGEMENT Solved Problems

14 (100 – 92) / 12k

p

=(110 + 95) / 214 + .67=

95= 15.28%