Q Ltd. has the following capital structure at book-value as on 31st March 2024: Particulars (₹) Equity share capital (10,00,000 shares) 4,00,00,000…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2025
Q Ltd. has the following capital structure at book-value as on 31st March 2024: Particulars (₹) Equity share capital (10,00,000 shares) 4,00,00,000 12% Preference shares 80,00,000 11% Debentures 2,00,00,000 6,80,00,000 The equity shares of the company are sold for 400. It is expected that next year the company will pay a dividend of 20 per equity share, which is expected to grow by 5% p.a. forever. Assume a 30% corporate tax rate. Required: (i) COMPUTE weighted average cost of capital (WACC) of the company based on the existing capital structure.

Suggested Answer and Working Notes:

Computation of Weighted Average Cost of Capital based on existing capital structure Source of Capital Existing Capital structure (₹) Weights (a) After tax cost of capital (%) (b) WACC (%) (a) x (b) Equity share capital (W.N.1) 4,00,00,000 0.588 10.00 5.88 12% Preference share capital 80,00,000 0.118 12.00 1.42 11% Debentures (W.N.2) 2,00,00,000 0.294 7.70 2.26 Total 6,80,00,000 1.000 9.56 Working Notes: 1. Cost of Equity Capital: Ke = Expected dividend(D1) / Current Market Price (P0) + Growth(g) = (20 / 400) + 0.05 = 10% 2. Cost of 11% Debentures Kd = Interest(1-t) / Net proceeds = 11% (1-0.30) / 100% = 0.077 or 7.7%

Topics: Part-A: Financial Management

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