(ii) COMPUTE the new WACC, if the company raises an additional 50 lakhs debt by issuing 12% debentures. This would result in increasing the expected…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2025
(ii) COMPUTE the new WACC, if the company raises an additional 50 lakhs debt by issuing 12% debentures. This would result in increasing the expected equity dividend to 25 and leave the growth rate unchanged, but the price of equity share will fall to 300 per share.

Suggested Answer and Working Notes:

Computation of Weighted Average Cost of Capital based on new capital structure Source of Capital New Capital structure (₹) Weights (a) After tax cost of capital (%) (b) WACC (%) (a) x (b) Equity share capital (W.N.3) 4,00,00,000 0.548 13.33 7.30 12% Preference share capital 80,00,000 0.110 12.00 1.32 11% Debentures (W.N.2) 2,00,00,000 0.274 7.70 2.11 12% Debentures (W.N.4) 50,00,000 0.068 8.40 0.57 Total 7,30,00,000 1.000 11.30 Working Notes: 3. Cost of Equity Capital: Ke = Expected dividend(D1) / Current Market Price (P0) + Growth(g) = (25 / 300) + 0.05 = 13.33% 4. Cost of 12% Debentures Kd = Interest(1-t) / Net proceeds = 12% (1-0.30) / 100% = 0.084 or 8.4%

Topics: Part-A: Financial Management

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