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Calculate weighted average cost of capital of a ABC ltd with the following data.
| Amount in Rs | After tax cost in % | |
|---|---|---|
| Equity share capital | 750000 | 13% |
| Retained earnings | 480000 | 14% |
| Preference share | 550000 | 11% |
| Capital | ||
| Debentures | 575000 | 9.75% |
| 2355000 |
Solution
The solution is mentioned below −
| Amount in Rs. | X | After tax cost in | Y | |
|---|---|---|---|---|
| Equity share capital | 750000 (A) | (A)/(Z)=0.32 (x1) | 0.13 (a) | (a)*(x1)=0.0416 |
| Retained earnings | 480000 (B) | (B)/(Z)= 0.20 (x2) | 0.14 (b) | (b)*(x2)= 0.028 |
| Preference share capital | 550000 (C) | (C)/(Z)= 0.23 (x3) | 0.11 (c) | (c)*(x3)= 0.0253 |
| Debentures | 575000 (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.
Updated on: 2020-09-25T16:21:51+05:30
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