ABC Ltd. has the following capital structure based on market values: Equity:60 lakhs Debt:40 lakhs Cost of Equity (Retained Earnings): 14% Cost of…

CA Intermediate · Financial Management and Strategic Management · MTP · September 2025
ABC Ltd. has the following capital structure based on market values: Equity:60 lakhs Debt:40 lakhs Cost of Equity (Retained Earnings): 14% Cost of New Equity (after accounting for 5% flotation cost): 15% Cost of Debt: 10% Corporate Tax Rate: 30% The company plans to raise additional capital by issuing new equity instead of using retained earnings. The capital structure weights will remain unchanged. What will be the impact on the Weighted Average Cost of Capital (WACC)?
(A) WACC will increase to 11.8%
(B) WACC will remain unchanged at 11.2%
(C) WACC will decrease to 8.8%
(D) WACC will increase only if debt increases

Suggested Answer and Working Notes:

Correct Answer: Option (A)

WACC will increase to 11.8%

Topics: Part-A: Financial Management

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