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

Sagar Ltd has the following capital structure at market-value weights: equity ₹60 lakh, 10% preference ₹10 lakh, and debt ₹30 lakh. Costs are equity 15%, preference 10% and post-tax debt 6%. A new project is financed with the same proportions. Each element of the capital structure is as given. What is the weighted average cost of capital?

WACC is 11.8%. With total capital of ₹100 lakh, weights are 60% equity, 10% preference and 30% debt. Weighted costs are 9%, 1% and 1.8%, which sum to 11.8%. A simple average ignores the weights and would understate the figure.

  1. A11.8%Correct
  2. B10.3%
  3. C12.0%
  4. D13.1%

Explanation

Total = ₹100 lakh. Weights: equity 0.6, preference 0.1, debt 0.3. WACC = 0.6x15 + 0.1x10 + 0.3x6 = 9 + 1 + 1.8 = 11.8%. A simple average of the three costs (10.33%) is wrong because it ignores weights.

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