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 %