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The capital structure of RST Ltd., as at 31st March, 2025, is as under: Particulars ₹ Equity Share Capital (100 each) 6,00,00,000 10% Cumulative…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2026

The capital structure of RST Ltd., as at 31st March, 2025, is as under: Particulars ₹ Equity Share Capital (100 each) 6,00,00,000 10% Cumulative Preference Shares (100 each) 2,00,00,000 12% Debentures 8,00,00,000 Retained Earnings 4,00,00,000 The equity shares are traded in the market and current market price of the share is 150 per share. The market value of preference share is 120 each. Market value of debentures is 8,60,00,000. For the year ended on 31st March, 2025, the company has paid equity dividend @24% and anticipates that it will grow by 5% every year. The tax rate applicable to the company is 25%. You are required to COMPUTE: (i) Cost of capital of each source of finance for the company. (ii) Weighted Average Cost of Capital (WACC) on the basis of book value weights. (iii) Weighted Average Cost of Capital (WACC) based on market value weights.

Suggested Answer and Working Notes:

(i) Cost of Equity - Ke = D₁ / P₀ + g = 24(1+0.05) /150 + 0.05 = 0.168 + 0.05 = 0.218 or 21.8% Cost of Preference share = 10/100 = 0.10 or 10% Alternatively - If cost of preference share is calculated on the basis of market price of preference share Cost of Preference share = 10/120= 0.0833 or 8.33% Cost of long term debt = I (1 - t) = 12 % (1 - 0.25) = 9% Cost of retained earning i.e. Ke= 21.8% (ii) Weighted Average Cost of Capital (book value weights) Source Amount (₹) Weight After tax cost of capital % WACC % Equity 6,00,00,000 0.3 21.8 6.54 Retained earnings 4,00,00,000 0.2 21.8 4.36 10% Preference shares 2,00,00,000 0.1 10 1 12% Long term debt 8,00,00,000 0.4 9 3.6 TOTAL 20,00,00,000 1 15.5 (iii) Weighted Average Cost of Capital (market value weights) Source Amount (₹) Weight After tax cost of capital % WACC % Equity 5,40,00,000 0.27 21.8 5.886 Retained Earning 3,60,00,000 0.18 21.8 3.924 10% Preference Shares 2,40,00,000 0.12 10 1.2 12% Long term debt 8,60,00,000 0.43 9 3.87 TOTAL 20,00,00,000 1.0 14.88 Alternatively using cost of preference share on the basis of market price Source Amount (₹) Weight After tax cost of capital % WACC % Equity 5,40,00,000 0.27 21.8 5.886 Retained Earning 3,60,00,000 0.18 21.8 3.924 10% Preference Shares 2,40,00,000 0.12 8.33 1 12% Long term debt 8,60,00,000 0.43 9 3.87 TOTAL 20,00,00,000 1.0 14.68

Topics: Part-A: Financial Management

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The capital structure of RST Ltd., as at 31st March, 2025, is as under: Particulars ₹ Equity Share Capital (100 each) 6,00,00,000 10% Cumulative…

Suggested Answer and Working Notes:

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