Linked PYQ
(a) As a Financial Manager of an engineering company, you are required to compute the weighted average cost of capital of the company using (1) Book-value weights and (2) Market-value weights. The company's present capital structure is: Equity Shares (Rs. 10 per share) Rs. 30,00,000; 10% Preference Shares (Rs. 100 per share) Rs. 4,00,000; 12% Debentures (Rs. 100 per debenture) Rs. 14,00,000; Total Rs. 48,00,000. All these securities are traded in the securities market. Their recent prices are: Debentures - Rs. 110 per debenture; Preference Shares - Rs. 115 per share; Equity Shares - Rs. 40 per share. Anticipated external financing opportunities are: (i) New Rs. 100 Debentures can be sold at par at 9% coupon rate, redeemable at 10% premium after 5 years. Flotation cost would be 2%; (ii) New Rs. 100 Preference Shares carrying 8% dividend can be sold at par, redeemable at premium of 5% after 10 years. Flotation cost would be Rs. 3 per share; (iii) New Rs. 10 Equity Shares can be sold at Rs. 35. Flotation cost would be 2% of issue price. Expected dividend on Equity Shares is 20%. Anticipated growth rate in dividend is 8%. Corporate tax rate is 40%.