Panyam Company’s capital structure in terms of market value is:

            Debt                  Rs.30 million

            Equity                Rs.60 million

The company plans to maintain this market-value capital structure. It has a plan to invest Rs.15 million next year. This will be financed as follows:

        Retained earnings              Rs.5 million

      Additional equity                  Rs.5 million

         Debt                                   Rs.5 million

The company’s equity stock presently sells for Rs.30 per share. The next dividend expected is Rs.3.00. The expected rate of dividend growth is 5 per cent. Additional equity can be issued at Rs.25 per share (net). The interest rate applicable to additional debt would be as follows:

First Rs.2.5 million 14 per cent

Next Rs.2.5 million 15 per cent

The tax rate for the firm is 60 per cent.

Required: 

(a) At what amounts of new capital will there be breaks in the marginal cost of capital schedule?

(b) What will be the marginal cost of capital in the interval between each of the breaks?

Answer rating: 100% (QA)

The amount of capital at which the weighted average ... View the full answer