The capital structure of RSA Limited is as under: (₹) Equity Shares (10 per share) 1,00,00,000 8% Irredeemable Preference Shares (100 per share)…

CA Intermediate · Financial Management and Strategic Management · PYQS · September 2025
The capital structure of RSA Limited is as under: (₹) Equity Shares (10 per share) 1,00,00,000 8% Irredeemable Preference Shares (100 per share) 5,00,00,000 Additional Information: (i) Equity shares are quoted at 60 each and a new issue priced at 60 will be fully subscribed; flotation cost will be 4 per share. (ii) Issue price of the 8% Irredeemable preference shares was - 45. (iii) Current market price of the 8% irredeemable preference shares is 55. RSA Limited has been paying dividend to its equity shareholders at a constant growth rate of 5% per year and the dividend paid this year was 2 per equity share. You are required to calculate: (i) The cost of equity using Gordon's model (ii) The cost of the irredeemable preference share (iii) The weighted average cost of capital using market value weights.

Suggested Answer and Working Notes:

(i) K e = D 0 (1+g) / (P 0 -F) + g = 2(1+0.05) / (60-4) + 0.05 = 2.10 / 56 + 0.05 = 0.0375 + 0.05 = 0.0875 or 8.75% (ii) K p = PD / P 0 = 8 / 45 = 0.1778 or 17.78% (iii) Calculation of WACC using market value weights Source of capital Market Value (₹) Weights (a) Cost of capital (b) WACC (K o ) (c) = (a) x (b) Equity shares 6,00,00,000 0.6857 0.0875 0.0600 Preference shares 2,75,00,000 0.3143 0.1778 0.0559 8,75,00,000 1 0.1159 WACC (K o ) = 0.1159% or 11.59% If P 0 is taken as current market price for calculation of preference share (ii) K p = PD / P 0 = 8 / 55 = 0.1455 or 14.55% (iii) Calculation of WACC using market value weights Source of capital Market Value (₹) Weights (a) Cost of capital (b) WACC (K o ) (c) = (a) x (b) Equity shares 6,00,00,000 0.6857 0.0875 0.06 Preference shares 2,75,00,000 0.3143 0.1455 0.0457 8,75,00,000 1 0.1057 WACC (K o ) = 0.1057% or 10.57%

Topics: Part-A: Financial Management

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