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CS Executive · Corporate Accounting and Financial Management · Cost of Capital

A company's capital structure at book values is: equity Rs 6,00,000 (cost 15%), preference Rs 2,00,000 (cost 12%) and debt Rs 2,00,000 (post-tax cost 8%). What is its WACC using book value weights?

The WACC is 13.0%. Weighting equity at 60% with 15%, preference at 20% with 12% and debt at 20% with 8% gives 9.0 + 2.4 + 1.6 = 13.0%, since total cost Rs 1,30,000 divided by Rs 10,00,000 capital equals 13%.

  1. A12.4%Correct
  2. B13.0%
  3. C11.67%
  4. D14.2%

Explanation

Weights are 0.6, 0.2, 0.2. WACC = 0.6x15 + 0.2x12 + 0.2x8 = 9.0 + 2.4 + 1.6 = 13.0%. Recheck: total cost Rs 1,30,000 on Rs 10,00,000 = 13.0%. So the key is 13.0%; the 12.4% option wrongly uses wrong weights.

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