Calculate the WACC using the following data by using Market Value weights: Particulars ₹ Equity Shares (10 per equity share) 15,00,000 Reserves…

CA Intermediate · Financial Management and Strategic Management · MTP · September 2024
Calculate the WACC using the following data by using Market Value weights: Particulars ₹ Equity Shares (10 per equity share) 15,00,000 Reserves & Surplus 5,00,000 Preference Shares (100 per preference share) 7,50,000 Debentures (100 per debenture) 5,50,000 The market prices of these securities are: Debentures -105 per debenture, Preference shares -115 per preference share Equity shares -27 per equity share Additional information: (1) 100 FV per debenture redeemable at premium of 10%, 10% coupon rate, 4% floatation costs, 10-year maturity. (2) 100 FV per preference share redeemable at par, 12% coupon rate, 2% floatation cost and 10-year maturity. (3) Equity shares have - 4.5 floatation cost and market price of 27 per share. The last dividend paid by the company was 2which is expected to grow at an annual growth rate of 9%. The firm has the practice of paying all earnings as a dividend. The corporate tax rate is 25%. To calculate the overall cost of debt & preference shares, take the average of their respective costs using YTM & approximation method.

Suggested Answer and Working Notes:

WN-1: Calculation of Cost of Debt (Kd) Approximation Method = Int (1-t)+(RV – NP)/N / (RV + NP) / 2 RV = 100 + 10% = 110, NP = 105 - 4% = 100.8 = 10 (1-0.25)+(110 – 100.8)/10 / (110 + 100.8) / 2 = 7.99% YTM Method: CMP (Po) (-) Floatation Cost = {Int(1-t) × PVAF (r%,10years)} + {RV × PVIF (r%,10th Year)} 105 - 4% = {10 (1 – 0.25) × PVAF (r%,10 years)} + {110 × PVIF (r%,10th year)} Using trial and error method, NPV at 5% & 10% Year Cash flows Disc Factor @ 5% PV (₹) Disc Factor @ 10% PV (₹) 0 -100.8 1 -100.8 1 -100.8 1 to 10 7.5 7.7217 57.91275 6.1446 46.0845 10 110 0.6139 67.529 0.3855 42.405 24.64175 -12.3105 IRR = 5+ 24.64175 / (24.64175-(-12.3105)) X (10-5) = 8.33% Therefore overall cost of debt (Kd) = (7.99 + 8.33) / 2 = 8.16% WN-2: Calculation of Cost of Preference (Kp) Approximation Method = Pref. Div.+(RV – NP)/N / (RV + NP) / 2 RV = 100 NP = 115 - 2% = 112.7 = 12 +(100 – 112.7)/10 / (100 + 112.7) / 2 = 10.09% YTM Method: CMP (Po) (-) Floatation Cost = {Pref Div × PVAF (r%,10years)} + {RV × PVIF (r%,10th Year)} 115 - 2% = {12 × PVAF (r%,10 years)} + {100 × PVIF (r%,10th year)} Using trial and error method, NPV at 5% & 10% Year Cash flows Disc Factor @5% PV (₹) Disc Factor @10% PV (₹) 0 -112.7 1 -112.7 1 -112.7 1 to 10 12 7.7217 92.6604 6.1446 73.7352 10 100 0.6139 61.39 0.3855 38.55 41.3504 -0.4148 IRR = 5+ 41.3504 / (41.3504 -(-0.4148)) X (10-5) = 9.95% Therefore, overall cost of debt (Kp) = (10.09 + 9.95) / 2 = 10.02% WN-3: Calculation of Cost of equity (Ke) Ke = {D1 / (Po - Floatation)} + G = {2+9% / 27 – 4.5} + 0.09 = 18.69% Calculation of WACC using market value weights Source of Capital Working Market Value (₹) Weights (A) Cost (K) (B) WACC (Ko) (A x Β) Equity 27 x 150000 40,50,000 0.7377 18.69 13.7877 Reserves Included in equity - - - - Preference 115 x 7500 8,62,500 0.1571 10.02 1.5741 Debentures 105 x 5500 5,77,500 0.1052 8.16 0.8584 54,90,000 1 16.22% WACC (Ko) = 16.22%

Topics: Part-A: Financial Management

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