Skip to content

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

Sundaram Ltd plans to raise Rs 10,00,000 of new capital in the proportion 40% debt and 60% equity. After-tax cost of new debt is 6% and cost of new equity is 15%. What is the marginal cost of capital for this raise?

The marginal cost of capital is 11.4%. Weight each new source by its proportion: 40% of 6% is 2.4% and 60% of 15% is 9.0%, which sum to 11.4%. The simple average of 10.5% is wrong because it ignores the weights.

  1. A10.5%
  2. B11.4%Correct
  3. C9.0%
  4. D10.0%

Explanation

MCC = 0.40 x 6% + 0.60 x 15% = 2.4% + 9.0% = 11.4%. Check: debt Rs 4,00,000 x 6% = 24,000; equity Rs 6,00,000 x 15% = 90,000; total 1,14,000 / 10,00,000 = 11.4%. A simple average of 6 and 15 gives 10.5%, which ignores weights.

Did you get it right without looking?

One question tells you little. A timed set on Cost of Capital shows your real accuracy, how long you take and where you lose marks.

Practise Cost of CapitalFree diagnostic mock

More Cost of Capital questions