Retained earnings have no explicit cost, so these funds are free of cost. comment. A Company's...

 

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"Retained earnings have no explicit cost, so these funds are free of cost". comment. A Company's present capital structure is: Equity Share (Rs. 100 per share) 12% Preference Share (Rs. 100 per share) 10% Debentures (Rs. 100 per debenture) Total Rs. 14,00,000 8,00,000 7,00,000 29,00,000 a. Market price of company's equity shares is 110 each and it is expected that a dividend of Rs.10 per share will be declared after one year. Dividends are expected to rise at 5 % p.a. Tax rate applicable to company is 40%. Calculate weighted average cost of capital. b. The company needs to borrow Rs. 12 lacs for its expansion plan, the rate of interest is 15%, what will be the company's revised weighted average cost of capital? As a result of this decision the dividend will be increased from Rs. 10 to Rs. 12 per share and the market price of equity shares will decline from Rs. 110 to Rs. 105 per share. "Retained earnings have no explicit cost, so these funds are free of cost". comment. A Company's present capital structure is: Equity Share (Rs. 100 per share) 12% Preference Share (Rs. 100 per share) 10% Debentures (Rs. 100 per debenture) Total Rs. 14,00,000 8,00,000 7,00,000 29,00,000 a. Market price of company's equity shares is 110 each and it is expected that a dividend of Rs.10 per share will be declared after one year. Dividends are expected to rise at 5 % p.a. Tax rate applicable to company is 40%. Calculate weighted average cost of capital. b. The company needs to borrow Rs. 12 lacs for its expansion plan, the rate of interest is 15%, what will be the company's revised weighted average cost of capital? As a result of this decision the dividend will be increased from Rs. 10 to Rs. 12 per share and the market price of equity shares will decline from Rs. 110 to Rs. 105 per share.

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