A company is considering the possibility of raising Rs 100 million, by issuing debt, preference capital, and equity and retaining earnings. The book values and the market values of the issues are as follows:
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(Rs in millions)
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Book Value
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Market Value
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Ordinary Shares
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40
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60
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Preference Shares
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20
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24
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|
Debt
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40
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36
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100
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120
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The following costs are expected to be associated with the above mentioned issues of capital. (Assume a 30 per cent tax rate.)
i The debt is in the form of Rs 1,000 face value debenture with a 16 per cent rate of interest.
ii The 11 per cent Rs 100 face value preference shares currently sell at Rs 120 per share.
iii The firm's ordinary share is currently selling for Rs 150. It is expected that the firm will pay a dividend of Rs 12 per share at the end of the next year, which is expected to grow at a rate of 7 per cent.
Compute the weighted average cost of capital using (i) book value weights (ii) market value weights.