CS Executive · Corporate Accounting and Financial Management · Capital Structure
Narmada Pharma Ltd. has the following capital structure at book values: equity share capital and reserves Rs 6,00,000 (cost 15%), 12% preference capital Rs 2,00,000 (cost 12%), and 10% debentures Rs 2,00,000 (after-tax cost 7%). Using book-value weights, what is the weighted average cost of capital (WACC)?
The WACC is 12.8%. With total capital of Rs 10 lakh, the weights are 60%, 20% and 20%. Multiplying by the costs of 15%, 12% and 7% gives 9.0, 2.4 and 1.4, which sum to 12.8%.
- A11.3%
- B12.0%
- C12.8%Correct
- D11.0%
Explanation
Total = Rs 10,00,000. Weights are 0.6, 0.2, 0.2. WACC = 0.6x15 + 0.2x12 + 0.2x7 = 9.0 + 2.4 + 1.4 = 12.8%. The 11.3% option arises from a different mix of weights, and 12.0% is a simple average-type error.
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