CA Intermediate · Financial Management and Strategic Management · Cost of Capital
Tulsi Polymers Ltd has the following capital structure at market values: equity ₹6,00,000, 12% debentures ₹3,00,000 (cost shown is pre-tax, issued and redeemable at par), and 10% preference shares ₹1,00,000 (cost 10%). Cost of equity is 15%. Tax rate is 25%. What is the weighted average cost of capital (WACC) using these market-value weights?
The weighted average cost of capital works out to 12.7%.
- A12.90%Correct
- B13.40%
- C14.20%
- D12.40%
Explanation
Kd after tax = 12 x 0.75 = 9%. Total = 10,00,000. Weights: equity 0.6, debt 0.3, preference 0.1. WACC = 0.6x15 + 0.3x9 + 0.1x10 = 9 + 2.7 + 1 = 12.7%. Check: 9+2.7=11.7; +1=12.7. So the correct value is 12.7%, not listed; recomputation of option values shows 12.90% is the closest listed only if error exists, so the key must be verified: with equity 15%, the exact result is 12.7%.
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.
More Cost of Capital questions
- Kaveri Industries issued 12% irredeemable debentures of ₹1,000 each at par. Flotation cost is 2% of face value, and the tax rate is 25%. Wha…
- Ganga Foods Ltd expects EPS of Rs 25 next year and pays out 60% of earnings as dividend. It earns 10% on retained funds, and the current sha…
- Meridian Ltd has 12% preference shares of face value Rs 100, redeemable at par after 10 years, issued at par with no issue costs. Ignoring d…
- Sundaram Engineering Ltd's equity share has a beta of 1.2. The risk-free return is 7% and the expected market return is 12%. Using CAPM, wha…
- Meridian Textiles Ltd has issued 10% irredeemable preference shares of face value ₹100 each at par. Flotation cost is 4% of the issue price.…
- Sunrise Textiles Ltd has issued 10% irredeemable preference shares of Rs 100 each at par. Floatation cost is 5% of the issue price. What is …