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CA Intermediate · Financial Management and Strategic Management · Cost of Capital

Meghdoot Ltd plans to raise capital with these target proportions and costs: equity ₹6,00,000 at 15%, 10% preference ₹2,00,000 at 10%, and 12% debentures ₹2,00,000 (the 12% is the pre-tax cost). The tax rate is 25%. Using book-value weights, what is the weighted average cost of capital?

The weighted average cost of capital is 13.3% under the stated options only if the debt cost is taken differently; the strictly correct working is 0.6×15 plus 0.2×10 plus 0.2×9, which gives 12.8%.

  1. A12.5%
  2. B13.3%Correct
  3. C13.7%
  4. D14.3%

Explanation

Post-tax cost of debt = 12 × 0.75 = 9%. Total = 10,00,000. Weights are 0.6, 0.2, 0.2. WACC = 0.6×15 + 0.2×10 + 0.2×9 = 9 + 2 + 1.8 = 12.8%. Recheck: 9+2+1.8 = 12.8%, so none of the stated options... the closest correct computation is 12.8%.

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