Weighed Average Cost of Capital (WACC)

Handout # 1
Question No. 1 (Concept Building Example)

A Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (50,000 shares @ Rs. 10
each) 500,000
Retained earnings & Reserve 50,000
Preference Share 300,000
Long term Loan (Debenture payable) 100,000
950,000
 Shareholder required rate of return (Ke) 18%.
 Preference share holder has a fixed dividend or required return (Kp) 14%.
 Debt holder required return (kd) 10%.

Note:

1. Book value and market value of shares, preference shares and debt are same.
2. No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC).

Question No. 2 (Concept Building Example) [Homework]

A Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (Rs. 10 each) 600,000
Retained earnings & reserve 70,000
Preference Share 500,000
Long term Loan (Debenture payable) 200,000
1,370,000
 Shareholder required rate of return (Ke) 16%.
 Preference share holder has a fixed dividend or required return (Kp) 13%.
 Debt holder required return (kd) 9%.

Note:

3. Book value and market value of shares, preference shares and debt are same.
4. No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC). [Answer: 13.88%]

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Question No. 3 (Concept Building Example)

B Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (50,000 shares @ Rs. 10 each) 500,000
Retained earnings & Reserve 65,000
Preference Share (@ Rs. 10 each) 300,000
Long term Loan (Debenture payable) (1,000 debenture @ Rs. 100 each) 100,000
965,000
 Shareholder required rate of return (Ke) 18%.
 Preference share holder required return (Kp) 14%.
 Debt holder required return (kd) 10%.
 Current market price of ordinary share is Rs. 15 each
 Current market price of Preference share is Rs. 11 each
 Current market price of debenture is Rs. 105.

Note: No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC).

Question No. 4 (Concept Building Example) [Homework]

B Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (Rs. 10 each) 400,000
Retained earnings & Reserve 55,000
Preference Share (@ Rs. 10 each) 250,000
Long term Loan (Debenture payable) (1,500 debenture @ Rs. 100 each) 150,000
855,000
 Shareholder required rate of return (Ke) 15%.
 Preference share holder required return (Kp) 12%.
 Debt holder required return (kd) 8%.
 Current market price of ordinary share is Rs. 17.50 each
 Current market price of Preference share is Rs. 12.60 each
 Current market price of debenture is Rs. 104.25.

Note: No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC). [Answer: 13.26%]

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Question No. 5 (Concept Building Example)

C Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (75,000 shares @ Rs. 10 each) 750,000
Retained earnings & reserve 45,000
Preference Share (@ Rs. 10 each) 200,000
Long term Loan (Debenture payable) (1,800 debenture @ Rs. 50
each) 90,000
1,085,000
 Shareholder required rate of return (Ke) 16.5%.
 Preference share holder required return (Kp) 12.5%.
 Debt holder required return (kd) 9%.
 Current market price of ordinary share cum dividend is Rs. 22 each
 Current market price of Preference share is Rs. 12 each
 Current market price of debenture is Rs. 103.
 Company has announced dividend Rs. 3 per share.

Note: No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC).

Question No. 6 (Concept Building Example) [Homework]

C Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (60,000 shares @ Rs. 10 each) 600,000
Retained earnings & reserves 40,000
Preference Share (@Rs. 10 each) 100,000
Long term Loan (Debenture payable) (2,100 debenture @ Rs.100 each) 210,000
950,000
 Shareholder required rate of return (Ke) 17.25%.
 Preference share holder required return (Kp) 11.5%.
 Debt holder required return (kd) 9.25%.
 Current market price of ordinary share cum dividend is Rs. 19 each
 Current market price of Preference share is Rs. 13 each
 Current market price of debenture is Rs. 102.
 Company has announced dividend Rs. 2.50 per share.

Note: No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC). [Answer: 15.41%]

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Question No. 7 (Concept Building Example)

D Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (75,000 shares @ Rs. 10 each) 750,000
Retained earnings & Reserve 60,000
Preference Share 200,000
Long term Loan (Debenture payable) (1,800 debenture @ Rs. 50
each) 90,000
1,100,000
 Shareholder required rate of return (Ke) 16.5%.
 Preference share holder required return (Kp) 12.5%.
 Debt holder required return (kd) 9%.
 Book value to market value 1.95
 Current market price of Preference share is Rs. 12 each
 Current market price of debenture is Rs. 103.

Note: No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC).

Question No. 8 (Concept Building Example) [Homework]

D Limited has a following Capital Structure at 30 th June 2021.

Rupees
Share Capital (80,000 shares @ Rs. 10 each) 800,000
Retained earnings & reserves 90,000
Long term Loan (Debenture payable) (1,200 debenture @ Rs. 100 each) 120,000
1,010,000
 Shareholder required rate of return (Ke) 16.5%.
 Debt holder required return (kd) 9%.
 Book value to market value 1.85
 Current market price of debenture is Rs. 103.

Note: No tax saving or no tax in world.

Required:

Calculate weighted average cost of capital (WACC). [Answer: 15.98%]

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