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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% |
| Corporate tax | 22.25% |
| Investor risk premium | 5.60% |
| Company stock beta | 1.25 |
Solution
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
= 0.078+0.0092
= 0.0872
= 8.72 %
Updated on: 25-Sep-2020
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