Three Problems on

Weighted Average Cost of Capital

By : Sagar Koshthi
USN:1PT1OMBA36
 Problem 1:
• A firm has the following capital structure and after tax costs for
the different sources of funds used:

Source of funds Amount Proportion After-tax cost

Rs. % %
Debt 15,00,000 25 5
Preference shares 12,00,000 20 10
Equity Shares 18,00,000 30 12
Retained Earnings 15,00,000 25 11
TOTAL 60,00,000 100

• Calculate WACC.
 Computation of Weighted Average Cost of
Capital

Source of funds Proportion After-tax cost Weighted cost %

% % Proportion x Cost (XW)%
Debt 25 5 1.25
Preference shares 20 10 2.00
Equity Shares 30 12 3.60
Retained Earnings 25 11 2.75
TOTAL 100 9.60%
 Problem 2:
• A firm has the following capital structure and after tax costs
for the different sources of funds used:
Source of funds Amount Proportion After-tax cost
Rs. % %
Debt 15,00,000 18.52 5
Preference shares 12,00,000 14.81 10
Equity Shares 54,00,000 66.67 12
(18000 shares @Rs.300)
TOTAL 81,00,000 100

• Calculate WACC.
 Computation of Weighted Average
Cost of Capital
Source of Amount Proportion After-tax cost Weighted cost
funds Rs. % % % Proportion x
Cost (XW)%
Debt 15,00,000 18.52 5 0.93
Preference 12,00,000 14.81 10 1.48
shares
Equity Share 54,00,000 66.67 12 8.00
capital
(18000 shares
@ Rs.300)

TOTAL 81,00,000 100 10.41%

 Problem 3
• The is the capital structure of Saras Ltd as on
31-12-2007:
• The market price of the company share is
Rs.110/- and it is expected that a dividend of
Rs.10/- per share would be declared after one
year the dividend growth rate is 6%
• Calculate weighted average cost of capital.
Equity shares – 20,000 shares of 20,00,000
Rs.100 each
10% preference shares of Rs.100 8,00,000
each
12% debentures 12,00,00
 Solution:
• Cost of equity capital(before tax)=
Ke=(D/MP)+G
D= Expected dividend per share
MP= Market price per share
G= Growth rate.

(10/110)100+6%
= 15.09
 Computation of Weighted Average Cost of Capital
(Before raising term loans)
Source of funds Amount Proportion Cost Weighted
Rs. % % cost
%
Equity shares – 20,00,000 50 15.09 7.54
20,000 shares of
Rs.100 each
10% preference 8,00,000 20 10.00 2.00
shares of Rs.100
each
12% debentures 12,00,00 30 12.00 3.60

40,00,000 13.14