Saathvik Limited is planning invest Rs. 200 Lakhs in a new project which will be financed by equity shares and term-loans in the ratio of 1:3. The existing capital structure of the company has the components as given below. The company has 10,00,000 equity shares of Rs 10 each, the associated reserves and surplus are Rs. 200 Lakhs. The current market price per equity share is Rs.50. The prevailing default-risk free interest rate on 10- year GOI Treasury Bonds is 5%. The average market risk premium is 7%. The beta of the existing activities of the company is 1.2. Where as the beta would become 1.5 when the proposed project is undertaken. The preference shares of the company have a face value of Rs 100, carry a dividend rate of 12% and there are 1,00,000 preference shares outstanding in the company. The preferred stock of the company is redeemable after 7 years is currently selling at Rs. 81 per preference share. There are 30,000 Rs. 1000 face value debentures carrying a coupon rate of 10% are redeemable at premium of 5% after 5 years and are quoting at Rs. 950 per debenture. The financial institutions have already funded the company with a long-term loan off 500 Lakhs carrying an interest rate of 8%. Any additional loan will cost the company 9%. The applicable income tax rate for the company is 30%. Answer the following questions What would be the weighted average cost of capital of the company according to book value and market value weights? What would be the book value marginal cost of additional funds?

Answer rating: 100% (QA)

The weighted average cost of capital of the company according to book value weights will be 873 The weighted average cost of capital of the company ac... View the full answer