Matro, a public limited company, has decided to launch a new flour brand with the name of “A1 Flour”. The shares of the Matro are selling in stock exchange at Rs. 62 and it has just paid the dividend of Rs. 10 which is expected to grow at 5.5%. The aggregate market return is expected to be 15% and treasury securities are yielding 8%. It has also Rs. 100 par 7.5 % preferred stock outstanding that is currently selling at Rs. 67. Metro is paying 11% interest of its bonds and has also obtained bank loan at 15%. The risk analysis shows that the beta of the company is 1.50

The capital Structure of Metro consists of:

Fund Source	Rate	Market Value	Weight
Equity		5,000,000	50%
Preference shares	7.5%	2,000,000	20%
Bonds	11%	2,000,000	10%
Bank Loan	15%	1,000,000	20%
Total	10,000,000

Required:

1. Find out after-tax cost of bond and bank loan. (Marks 2 + 2 = 4)
2. Find out the cost of preference shares. (Marks 3)
3. Find out the cost of equity assuming that CAPM is the best approach to find out the cost of equity. (Marks 3)
4. Find out the cost of equity assuming that Dividend Growth Model is the best approach to find out the cost of equity. (Marks 3)

Calculate the weighted average cost of capital assuming that Dividend Growth Model is the best approach to find out the cost of equity tax rate is 30%

Answer rating: 100% (QA)

Find out after tax cost of bond and bank loan After tax cost of Bond K 11 011 Tax rate T 30 03 After ... View the full answer