Calculate weight average cost of capital of a company XYZ using below assumption data.

Banking & FinanceFinance ManagementGrowth & Empowerment

Number of outstanding shares2500000
Price of each shareRs. 48/-
Market value for bondsRs. 30000000/-
Risk free rate ( 10 year treasury)2.75%
Cost of rate of return on company bonds (cost of return)5.90%
Corporate tax22.25%
Investor risk premium5.60%
Company stock beta1.25

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 %

raja
Published on 25-Sep-2020 16:20:17
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