Problems on Weighted Average Cost of Capital
(WACC)(15 Marks)
1. From the following capital structure of a company determine weighted average
cost of capital
Equity capital 20,00,000
Debentures 12,00,000
Preference share capital 8,00,000
40,00,000
Anticipated external financial information:
a) Equity share: share price 120 per share and flotation cost 8 per share. The
expected growth rate in dividend is 7% p.a. the expected dividend at the end
of current financial years RS.11 per share.
b) 15years, 14% debentures of Rs.1000 face value redeemable at 5% premium,
sold at par, 3% flotation cost.
c) 7 years, 12% preference shares of Rs. 100 each sold at par redeemable at 5%
premium, 2% flotation cost.
The corporate tax rate is 35%.
2. X co. ltd is interested in measuring its weighted average cost of capital, you
have been supplied with the following information:
Debentures 9,00,000
Preference share capital 4,50,000
Equity share 12,00,000
Retained earnings 4,50,000
30,00,000
Anticipated external financial information:
a) 20years, 8% debentures of Rs. 2500 face value, redeemable at 5%
premium sold at par 2% flotation costs.
b) 10% preference shares of Rs. 100 each, sales price Rs. 100per share, 2%
flotation cost.
c) Equity shares : sales price Rs.115 per share, flotation costs Rs. 5 per share.
Expected equity dividend growth is 5% per year. The expected dividend
at the end of the current financial year is Rs. 11 per share.
The corporate tax rate is 35%. Calculate WACC.
3. A manufacturing company has the following capital structure:
Equity capital 20,00,000
Preference capital 8,00,000
Debentures 25,00,000
53,00,000
Anticipated external financial information:
a) 15 years, 12% debentures of Rs. 1000 face value, redeemable at 6% premium.
Sold at par and floatation cost Rs. 10each
b) 16% preference share of Rs. 50/- each, sale price Rs. 48\- per share
redeemable after 10years at Rs. 52/- each.
c) Equity shares having face value of Rs. 20 each, the sales price being Rs. 26/-
each and flotation costs Rs.1/- each.
The corporate tax rate is 30% and the expected growth rate in equity dividend
in 6%. The expected dividend at the end of the current financial year is Rs2/- per
share.
From the above information, determine the weighted average cost of capital
of the company.
4. A Ltd. Has the following capital structure:
Ordinary share capital (Rs. 10 each) 50,00,000
8% preference shares 15,00,000
6% debentures 25,00,000
90,00,000
The market price of equity is Rs10/-. The company is expected to pay a dividend
of Rs. 4 per share which will grow at 8% forever. Assuming a tax rate of 35%.
Compute the following:
a) Weighted average cost of capital based on existing capital structure.
b) The new weighted average cost of capital, if the company raise an
additional capital of Rs. 30,00,000/- by 10% debenture. The additional
debt would increase in the expected dividend to Rs.5 per share however,
growth rate remains the same but the price of share will fall to Rs. 8/- per
share.
5. Anu Ltd. Has the following capital structure:(last year question )
Particulars Rs.
Equity share capital [Rs.50 each] 50,00,000
10% preference share 10,00,000
12% debentures 20,00,000
80,00,000
The market price of equity share is Rs 70. The company is expected to pay a
dividend of Rs. 7 share which will grow at 8% forever. Assuming a tax rate @30%.
Compute the following:
a) WACC based on existing capital structure
b) The new WACC if the company raises an additional capital of Rs.20,00,000, by
issuing 15% debentures which would result in increase in the expected dividend
to Rs. 8 per share. However the growth rate remains the same, but the price of
the share will fall to Rs.60 per share.
6. A company has following capital structure:
16% debenture 40,00,000
12% preference share capital 18,00,000
Equity share capital (1,00,000 shares of RS. 10/-) 10,00,000
68,00,000
The market price of equity is Rs. 18. The company is expected to pay a dividend
of Rs.6 per share which will grow at 10% forever. Assuming tax rate of 30%.
Compute:
a) Weighted average cost of capital based on existing capital structure.
b) The new weighted average cost of capital, if the company raise an
additional capital of Rs. 40,00,000/- by 20% debenture. The additional
debt would increase in the expected dividend to Rs.8 per share however,
growth rate remains the same but the price of share will fall to Rs. 15/-
per share.
7. A ltd. Company has the following capital structure:
Equity share capital
(1,00,000 shares of Rs. 10) 10,00,000
10% preference shares 8,00,000
12% Debentures 12,00,000
30,00,000
The market price of equity is Rs. 10. The company is expected to pay a dividend of Rs.5
per share which will grow at 8% forever. Assuming tax rate of 30%.
Compute:
a) Weighted average cost of capital based on existing capital structure.
b) The new weighted average cost of capital, if the company raise an
additional capital of Rs. 10,00,000/- by 13% debenture. The additional
debt would increase in the expected dividend to Rs.6 per share however,
growth rate remains the same but the price of share will fall to Rs. 8/- per
share.
