Bata Shoes has taken debt of Rs. (1811302) at the rate of 25% from MCB and another debt of Rs. (2031181) at the rate 25% from HBL. The company has obtained equity financing through issuance of stocks. Total size of equity is 50 million. Analysts think that the appropriate risk premium for Bata Shoes is 9%, risk free is 8% and Bata shoes has beta of 1.40. Bata Shoes has currently paid a dividend of Rs.3 per share. The market price of stock of Bata Shoes is Rs.50. The expected constant growth rate in dividend is 5% which will remain same throughout the period of analysis.

a. Define cost of capital and Weighted Average Cost of Capital.

b. Calculate cost of equity under Dividend Discount Model.

c. Calculate cost of equity under Capital Asset Pricing Model.

d. Calculate Weighted Average Cost of Capital using different estimated values of cost of equity under parts b and c.

Answer rating: 100% (QA)

a Cost of capital refers to the rate of return a company needs to earn on its investments in order t... View the full answer