Question
ABC Ltd. has the following book value capital structure as on March, 31, 2024.
| Equity share capital (2,00,000 shares) | 60,00,000 |
| 10% preference shares | 10,00,000 |
| 12% Debentures | 30,00,000 |
| 100,00,000 |
The equity share of the company sells at Rs. 30. It is expected that the company will pay next year a dividend of Rs. 3 per equity share which is expected to grow at 5% p.a. forever, Assume 40% corporate tax rates.
Based on the above information calculate.
(a) Weighted average cost of capital (WACC) of the company based on the existing capital structure.
(b) Compute the new WACC if the company raises an additional 40 Lakh debt by issuing 13% debentures. This would result in increasing the expected dividend to Rs. 3.60 and leave the growth rate unchanged but the price of the equity share will fall to Rs. 24.
Answer :
Word Count : 803
To calculate the Weighted Average Cost of Capital (WACC), we will follow a structured approach by first determining the cost of equity, cost of preference shares, and cost of debt. ### Part (a) - WACC of the company based on the existing capital structure #### Step 1: Calculate the Cost of Equity (Ke) The cost of equity can be calculated using the Dividend Discount Model (DDM), which is given by: \[ K_e = \frac{D_1}{P_0} + g \] Where: - \( D_1 \) is the expected dividend next year (Rs. 3) - \( P_0 \) is the price of the equity share (Rs. 30) - \( g \) is the growth rate (5%) \[ K_e = \frac{3}{30} + 0.05 = 0.10 + 0.05 = 0.15 \text{ or } 15\% \] #### Step 2: Calculate the Cost of Preference Shares (Kp) The cost of preference shares is given by the dividend rate on preference shares: \[ K_p = \frac{\text{Preference Dividend}}{\text{Market Price of _____ ___ _____ ______ __________ _____ __________ _____ _________ ______ ____.
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To calculate the Weighted Average Cost of Capital (WACC), we will follow a structured approach by first determining the cost of equity, cost of preference shares, and cost of debt. ### Part (a) - WACC of the company based on the existing capital structure #### Step 1: Calculate the Cost of Equity (Ke) The cost of equity can be calculated using the Dividend Discount Model (DDM), which is given by: \[ K_e = \frac{D_1}{P_0} + g \] Where: - \( D_1 \) is the expected dividend next year (Rs. 3) - \( P_0 \) is the price of the equity share (Rs. 30) - \( g \) is the growth rate (5%) \[ K_e = \frac{3}{30} + 0.05 = 0.10 + 0.05 = 0.15 \text{ or } 15\% \] #### Step 2: Calculate the Cost of Preference Shares (Kp) The cost of preference shares is given by the dividend rate on preference shares: \[ K_p = \frac{\text{Preference Dividend}}{\text{Market Price of _____ ___ _____ ______ __________ _____ __________ _____ _________ ______ ____.
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