The management of the company ABC wants to calculate the companys weighted average cost of capital. The
Question:
The management of the company ABC wants to calculate the company’s weighted average cost of capital. The relevant data pertaining to the capital structure is as follows.
Rs. in million
18% preference shares (face value of Rs. 10 per share) | 125 |
Equity share capital (face value of Rs. 10 per share) | 385 |
Reserves | 500 |
18% long-term loans | 325 |
15% debentures | 230 |
Total | 1,565 |
The management of the company gathered following additional information.
Current ex-dividend preference shares price (Rupees) | 12.5 |
Current ex-dividend equity shares price (Rupees) | 28 |
Current ex-interest debenture market value (Rupees) | 110 |
Equity beta of the company | 0.8 |
Stock market risk premium | 9.5% |
Yield on long-term risk-free security | 5.5% |
The par value of the debentures is Rs. 100, which will be redeemed in 4 years and interest is paid on annual basis. The company uses a tax rate of 31%, ignoring flotation costs.
Expert Answer:
Weighted average cost of capital WACC can be calculated as follows WACC EV Rf DV Rd PV ... View the full answer
