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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Capital Structure

Meghna Pharma Ltd has an equity share capital of ₹40,00,000 and 10% debentures of ₹60,00,000. Its cost of equity is 15% and the tax rate is 30%. Using book values as weights, what is its weighted average cost of capital (WACC)?

WACC is 10.20%. Equity forms 40% at 15% cost and debt 60% at an after-tax cost of 7% (10% less 30% tax shield). Weighted, this is 6% plus 4.2%, giving 10.20%.

  1. A8.70%
  2. B10.20%Correct
  3. C11.40%
  4. D9.60%

Explanation

Total capital is ₹1,00,00,000; weights are 40% equity and 60% debt. After-tax cost of debt = 10% × (1-0.30) = 7%. WACC = 0.4×15% + 0.6×7% = 6% + 4.2% = 10.20%. Using the pre-tax cost of debt would give 0.4×15 + 0.6×10 = 12%, which is not offered, and swapping weights gives 0.6×15 + 0.4×7 = 11.8%.

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