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    S Lu
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    The document calculates the cost of equity, preference shares, and debentures for a company. It then determines the weights of each type of capital based on total investments. Using the costs and weights, it calculates the weighted average cost of capital at 15.375%.

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    The document calculates the cost of equity, preference shares, and debentures for a company. It then determines the weights of each type of capital based on total investments. Using the costs and weights, it calculates the weighted average cost of capital at 15.375%.

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    5 views1 page

    Q 2

    Uploaded by

    S Lu
    The document calculates the cost of equity, preference shares, and debentures for a company. It then determines the weights of each type of capital based on total investments. Using the costs and weights, it calculates the weighted average cost of capital at 15.375%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Answer:

    Cost of equity capital:


    CE = (Dividend/Current market price of share) + g = (3/20)+8% = 0.15
    CE = 23%
    Cost of preference share capital:
    CP = (Annual preference share dividend/Net proceeds in the
    issue of preference share) = 50000/500000 = 0.1
    CP = 0.1
    Cost of Debentures:
    CD = (1/Net Proceeds) (Interest -Tax) = (1/1500000)(210000-105000)
    CD = 0.07

    Weights of equity share capital, preference share capital and


    debentures in total investment of ‘40,00,000’:
    Weight of Equity Share Capital
    WE = (Total equity share capital / Total Investments) = (20,00,000/40,00,000)
    WE = 0.5
    Weight of Preference Share Capital
    WP = (Total preference share amount / Total Investments) = (5,00,000/40,00,000)
    WP = 0.125
    Weight of Debentures
    WD = (Total Debentures / Total Investments) = (15,00,000/40,00,000)
    WD = 0.375

    Existing amt after tax cost weights weighted


    cost
    Equity share capital 2000000 0.23 0.500 0.115
    preference share capital 500000 0.1 0.125 0.0125
    debentures 1500000 0.07 0.375 0.02625
    total=.15375

    Weighted average cost of capital = 15.375%

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