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Calculate weight average cost of capital of a company XYZ using below assumption data.
|Number of outstanding shares||2500000|
|Price of each share||Rs. 48/-|
|Market value for bonds||Rs. 30000000/-|
|Risk free rate ( 10 year treasury)||2.75%|
|Cost of rate of return on company bonds (cost of return)||5.90%|
|Investor risk premium||5.60%|
|Company stock beta||1.25|
The solution is mentioned below −
Market value (A) = no.of shares * price => 2500000 * 48 => Rs. 120000000/-
Determine company debt = 30000000
Cost of equity = 2.75% +5.60*1.25 => 0.0975
Cost of debt = 5.90*(1-22.25%) => 0.046
Weight of cost of capital = (R/V*Ke)+(D/V)*Kd*(1-tax rate)
=(120000000/150000000)*0.0975 + (30000000/150000000)*0.046
= 8.72 %
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