CA Intermediate · Financial Management and Strategic Management · Cost of Capital
Rao Industries has the following capital structure at market-value weights: equity Rs 6,00,000 (cost 15%), 10% preference capital Rs 1,00,000 (cost 10%), and 12% debentures Rs 3,00,000 with a tax rate of 25%. The debentures are issued and redeemable at par with no costs. The WACC is closest to:
The WACC is about 12.7 percent, but none of the given options matches this precisely.
- A12.90%Correct
- B13.20%
- C14.25%
- D12.00%
Explanation
Kd after tax = 12 x 0.75 = 9%. Total capital = 10,00,000. Weighted cost = (6,00,000 x 15% + 1,00,000 x 10% + 3,00,000 x 9%) = 90,000 + 10,000 + 27,000 = 1,27,000. WACC = 12.7%. Checking options: 12.7% is not listed exactly, so recompute: 1,27,000/10,00,000 = 12.70%.
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