Divine Limited has the following capital structure, which it considers to be optimal: Capital Structure Weightage (in percentage) Debt 25 Preference…

CA Intermediate · Financial Management and Strategic Management · MTP · January 2026
Divine Limited has the following capital structure, which it considers to be optimal: Capital Structure Weightage (in percentage) Debt 25 Preference Shares 15 Equity Shares 60 100 Divine Limited's expected net income this year is 34,285.72, its established dividend payout ratio is 30 per cent, its tax rate is 40 per cent, and investors expect earnings and dividends to grow at a constant rate of 9 per cent in the future. It paid a dividend of 3.60 per share last year, and its shares currently sell at a price of 54 per share. Divine Limited requires additional funds which it can obtain in the following ways: Preference Shares: New preference shares with a dividend of 11can be sold to the public at a price of 95 per share.Debt: Debt can be sold at an interest rate of 12 per cent. You are required to: (i) DETERMINE the cost of each capital structure component; and (ii) COMPUTE the weighted average cost of capital (WACC) of Divine Limited.

Suggested Answer and Working Notes:

(i) Computation of Costs of Different Components of Capital Equity Shares K e = D 1 /P 0 + g = D 0 (1+g)/P 0 + g = 3.60 (1.09) / 54 + 0.09 = 0.0727 + 0.09 = 16.27%. Preference Shares K p = Preference Share Dividend / P 0 = 11 / 95 = 11.58%. Debt at K d = 12% K d (1 – T) = 12 (1 – 0.4) = 12% (0.6) = 7.20%. (ii) Weighted Average Cost of Capital (WACC) WACC = W d K d (1 – T) + W p K p + W e K e WACC = 0.25 (7.2%) + 0.15 (11.58%) + 0.60 (16.27%) = 1.8 + 1.737 + 9.762 = 13.30%.

Topics: Part-A: Financial Management

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