Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 497 views

    WMCC Assignment 15TH April

    Uploaded by

    Ramya Gowda
    The document provides information to calculate the weighted average cost of capital (WACC) for multiple problems. For Problem 1, the WACC is calculated to be 9.6% based on the capital structure and costs provided. For Problem 2, the WACC is calculated to be 11.35% using book values and 9.75% for the marginal cost of new funds. Problem 3 provides additional information to calculate WACC using both book and market values, which are 13.35% and 14.24% respectively. Finally, for Problem 4 the WACC is calculated to be 15.55% based on the capital structure and costs given.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    WMCC Assignment 15TH April

    Uploaded by

    Ramya Gowda
    497 views18 pages
    The document provides information to calculate the weighted average cost of capital (WACC) for multiple problems. For Problem 1, the WACC is calculated to be 9.6% based on the capital structure and costs provided. For Problem 2, the WACC is calculated to be 11.35% using book values and 9.75% for the marginal cost of new funds. Problem 3 provides additional information to calculate WACC using both book and market values, which are 13.35% and 14.24% respectively. Finally, for Problem 4 the WACC is calculated to be 15.55% based on the capital structure and costs given.

    Original Description:

    notes

    Original Title

    WMCC ASSIGNMENT 15TH APRIL

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides information to calculate the weighted average cost of capital (WACC) for multiple problems. For Problem 1, the WACC is calculated to be 9.6% based on the capital structure and costs provided. For Problem 2, the WACC is calculated to be 11.35% using book values and 9.75% for the marginal cost of new funds. Problem 3 provides additional information to calculate WACC using both book and market values, which are 13.35% and 14.24% respectively. Finally, for Problem 4 the WACC is calculated to be 15.55% based on the capital structure and costs given.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    497 views18 pages

    WMCC Assignment 15TH April

    Uploaded by

    Ramya Gowda
    The document provides information to calculate the weighted average cost of capital (WACC) for multiple problems. For Problem 1, the WACC is calculated to be 9.6% based on the capital structure and costs provided. For Problem 2, the WACC is calculated to be 11.35% using book values and 9.75% for the marginal cost of new funds. Problem 3 provides additional information to calculate WACC using both book and market values, which are 13.35% and 14.24% respectively. Finally, for Problem 4 the WACC is calculated to be 15.55% based on the capital structure and costs given.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    15TH APRIL

    WACC & WMCC ASSIGNMENT


    PROBLEM 1:
    A firm has the following capital structure and after tax costs for the different
    sources of funds used:

    Source of funds Amount Proportion After –


    (%) tax cost
    (%)
    Debt 1500000 25 5
    Preference shares 1200000 20 10
    Equity shares 1800000 30 12
    Retained 1500000 25 11
    earnings
    You are required to 6000000
    Total compute the WACC.
    100  
    SOLUTION:
    Source of funds Amount Proportio After tax cost WACC
    n (%) (%)
    Debt 1500000 0.25 0.05 0.0125

    Preference shares 1200000 0.20 0.10 0.020


    Equity shares 1800000 0.30 0.12 0.036
    Retained earnings 1500000 0.25 0.11 0.0275
    Total 6000000 1   0.096*100
    =9.6%
    PROBLEM 2
    A firm has the following capital structure and after-tax costs for the different
    sources of funds used:
    Source of funds Amount Proportion After – tax cost
    (%) (%)
    Debt 450000 30 7
    Preference capital 375000 25 10

    Equity capital 675000 45 15


      1500000 100  

    a) Calculate the WACC using book value weights.


    b)The firm wishes to raise further Rs.600000 for the expansion of the project as below
    Assuming that specific costs do not change, compute the weighted marginal cost of
    capital .
    Debt 300000

    Preference capital 150000

    Equity capital 150000


    SOULTION:
    a) Calculation of the WACC using book value weights.

    Source of Amount Proportion After – tax cost WACC


    funds (%) (%)
    Debt 450000 0.30 7 2.1
    Preference 375000 0.25 10 2.5
    capital
    Equity 675000 0.45 15 6.75
    capital
      1500000 1   11.35
    b)The firm wishes to raise further Rs.600000 for the expansion of the project as below
    Assuming that specific costs do not change, computation of the weighted marginal
    cost of capital .
    Source of funds Amount Propor After – WACC
    tion tax cost
    (%) (%)
    Debt 300000 0.50 7 3.5
    Preference capital 150000 0.25 10 2.5
    Equity capital 150000 0.25 15 3.75
    600000 1 9.75
    PROBLEM 3
    XYZ Limited has the following book value capital structure:

    Particulars (Rs.
    Crore)
    Equity capital (Rs.10 per share fully paid- 15
    up at par)
    11% preference capital (Rs.100 per share, 1
    fully paid-up at par)
    Retained earnings 20
    13.5% Debentures of Rs.100 each 10
    15% term loan 12.5
    The next expected dividend on equity shares per share is Rs.3.60
    and the dividend per share is expected to grow at the rate of 7%.
    The market price per share is Rs.40.
    Preference stock, redeemable after 10years is currently selling at
    Rs.75 per share.
    Debenture redeemable after six years are selling at Rs.80 per
    debenture. Tax rate 50%. Required to calculate weighted average
    cost of capital using:
    a) Book value proportions
    b) Market value proportions
    SOLUTION:
    Step 1: Calculation of specific cost of specific cost of capital:
    A) cost of equity:
    Ke = D/MP + g
    = 3.60 / 40 + 0.07
    = 0.09+ 0.07
    = 0.16 * 100 = 16%
    B) Cost of retained earning = same as cost of equity
    Kr= 16%
    C) Cost of redeemable preference share capital:
    Kp = 11 + 1/10 (100 – 75)
    ½ (100+75)
    = 11 + 2.5 / 87.5
    = 0.1543* 100 = 15.43%
    D) After tax cost of redeemable debentures:
    Kda = I (1-t) +1/n (R V– NP)
    Kda = 13.5 (1-0.50) + 1/6(100-80)
    ½(100+80) ½ (R V+ NP)
    = 0.112*100 = 11.2%
    E) cost of term loan:
    K = I / NP (1 – t)
    = 15/100 (1 -0.50)
    = 0.075* 100 = 7.5%
    COMPUTATION OF WACC USING BOOK VALUE
    WEIGHTS:
    SOURCES OF FUNDS Book Proportion Cost Weighted cost
    value %
    (Rs. In
    crores)
    Equity capital 15 0. 2564 16% 4.1024
    Preference capital 1 0.0171 15.43% 0.2638
    (11%)
    Retained earnings 20 0.3419 16% 5.4704
    Debentures (13.5%) 10 0.1709 11.2% 1.9141
    Term loans (15%) 12.5 0. 2137 7.5% 1.6027
    58.5 1 WACC 13.35%
    COMPUTATION OF WACC USING MARKET VALUE
    WEIGHTS:
    SOURCES OF MARKET Proportion Cost% Weighted
    FUNDS value (Rs. % cost
    crores)
    Equity capital 60 0.738 16% 11.808
    Preference capital 0.75 0.009 15.43% 0.13887
    (11%)
    Debentures (13.5%) 8 0.098 11.2% 1.0976
    Term loans (15%) 12.5 0.15 7.5% 1.125
    81.25 1 WACC 14.24%
    PROBLEM 4
    ABC Ltd. has paid up equity capital 600000 equity shares of Rs.10 each. The
    current market price of the shares is Rs.26. during the current year, the
    company has declared a dividend of Rs.4 per share. The company has also
    previously issue 14% preference shares of Rs.10 each aggregating Rs.30 lakhs
    and 13% 50000 debentures of Rs.100 each.
    The company corporate tax rate is at 40%, the growth rate of dividends on
    equity shares is expected at 6%. In case of preference shares the company has
    received only 95% of the face value of shares after deducting issue expenses.
    Calculate weighted average cost of capital of the company.
    SOLUTION:
    Step 1: Calculation of specific cost of specific cost of capital:
    A) cost of equity:
    Ke = D/MP + g
    = 4 / 26 + 0.06
    = 0.15+ 0.06
    = 0.2138 * 100 = 21.38%
    B) Cost of irredeemable preference share capital:
    Kp = 4.2
    28.5
    = 0.1473* 100 = 14.73%
    C) After tax cost of irredeemable debentures:
    Kda =13 (1-0.40)
    = 7.8%
    COMPUTATION OF WACC USING BOOK VALUE
    WEIGHTS:
    SOURCES OF FUNDS Book Proportion Cost Weighted cost
    value %
    (Rs. In
    LAKHS)
    Equity capital 60 0.4285 21.38% 9.161
    Preference capital 30 0.2142 14.73% 3.1536
    (14%)
    Debentures (13%) 50 0.3572 7.8% 2.786
    140 1 WACC 15.55%

    You might also like