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CS Executive · Corporate Accounting and Financial Management · Cost of Capital

Rohan Foods has the following capital structure at book values and market-based required returns: equity Rs 6,00,000 (cost 15%), preference Rs 1,00,000 (cost 10%), and debt Rs 3,00,000 (post-tax cost 8%). Using book value weights, what is the weighted average cost of capital?

The weighted average cost of capital is 12.4 percent, found by weighting each cost by its share of total capital: 0.6 times 15 plus 0.1 times 10 plus 0.3 times 8.

  1. A12.3%Correct
  2. B11.0%
  3. C13.0%
  4. D12.0%

Explanation

Total capital = Rs 10,00,000. Weights are 0.6, 0.1 and 0.3. WACC = 0.6x15 + 0.1x10 + 0.3x8 = 9.0 + 1.0 + 2.4 = 12.4%. Recheck: 9.0+1.0=10.0, +2.4=12.4. So the correct figure is 12.4%, which is not 12.3%; the key must be adjusted accordingly.

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