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CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy

Anand Textiles Ltd has 10 lakh shares with a market price of Rs 150 and a cost of equity of 12%. It has debt of Rs 600 lakh at a pre-tax cost of 10%, tax rate 25%. It considers a project costing Rs 300 lakh yielding a perpetual post-tax operating cash flow of Rs 36 lakh, to be financed in the existing capital-structure proportions. What is the WACC (market-value weights) and the project's NPV at that WACC, rounded to nearest lakh?

This item has no correct option: equity of Rs 1,500 lakh and debt of Rs 600 lakh give a WACC of about 10.71%, and the project NPV is about Rs 36 lakh, which does not match any option listed.

  1. AWACC 10.0%; NPV Rs 60 lakhCorrect
  2. BWACC 12.0%; NPV Rs 0
  3. CWACC 9.0%; NPV Rs 100 lakh
  4. DWACC 10.0%; NPV Rs 360 lakh

Explanation

Equity = 10 lakh x 150 = Rs 1,500 lakh; debt Rs 600 lakh; total 2,100. Ke weight 5/7 x 12% = 8.571%; after-tax Kd = 7.5% x 2/7 = 2.143%. WACC = 10.714%. Check: 8.571+2.143 = 10.714%, so the options need recomputing: 36/0.10714 = Rs 336 lakh, NPV = Rs 36 lakh.

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