Calculate weighted average cost of capital of a ABC ltd with the following data.




Amount in RsAfter tax cost in %
Equity share capital75000013%
Retained earnings48000014%
Preference share55000011%
Capital

Debentures5750009.75%

2355000

Solution

The solution is mentioned below −


Amount in Rs.XAfter tax cost inY
Equity share capital750000 (A)(A)/(Z)=0.32 (x1)0.13 (a)(a)*(x1)=0.0416
Retained earnings480000 (B)(B)/(Z)= 0.20 (x2)0.14 (b)(b)*(x2)= 0.028
Preference share capital550000 (C)(C)/(Z)= 0.23 (x3)0.11 (c)(c)*(x3)= 0.0253
Debentures575000 (D)(D)/(Z)= 0.25 (x4)0.0975 (d)(d)*(x4)= 0.0244
Total (Z)2355000

0.1193

Weighted average cost of capital = 11.93%

That means, company is paying 11.93% premium to the investors.

raja
Published on 25-Sep-2020 16:21:24
Advertisements