Page 323 - Corporate Finance PDF Final new link

BRILLIANT’S Cost of Capital 323

Equity Shares / Bp³dQ>r eo¶g© 6,00,000 12,00,000 13%
Retained Earnings / [aQ>oÝS> A{Zª½g 2,00,000 – 9%

Your are required to calculate Weighted Average Cost of Capital using: (a) Book Value Weights
(b) Market Value Weights.
AmnH$mo {ZåZ H$m Cn¶moJ H$aHo$ H¡${nQ>b H$s doQ>oS> EdaoO H$m°ñQ> H$s JUZm H$aZm h¡… (a) ~wH$ d¡ë¶y doQ²>g (b) ‘mH}$Q>
d¡ë¶y doQ²>g

Solution:
(a) Calculation of WACC using Book Value Weights
Sources Amount Ratio Cost (%) Weighted Cost (%)
(`)
Debentures 4,00,000 4/13 5 1.54
Preference shares 1,00,000 1/13 8 0.62
Equity shares 6,00,000 6/13 13 6.00
2,00,000
Retained earnings NPP 2/13 9 1.38
13,00,000 WACC 9.54%

(b) Calculation of WACC using Market Value Weights
Note: The market value of equity will be divided in the ratio of book values of equity and
retained earnings.

12,00,000 6
(i) Market value of equity = 9,00,000
8
(ii) Market value of Retained Earnings

12,00,000 2
= 3,00,000
8
Sources Amount Ratio Cost (%) Weighted Cost (%)
(`)
Debentures 3,80,000 38/169 5 1.12
Preference shares 1,10,000 11/169 8 0.52
Equity shares 9,00,000 90/169 13 6.92
Retained earnings 3,00,000 30/169 9 1.60
16,90,000 WACC 10.16%

Illustration 4.1.21
A company was recently formed to manufacture a product. It has the following Capital
Structure:
EH$ H§$nZr Hw$N> g‘¶ nhbo EH$ àmoS>³Q> Ho$ {Z‘m©U Ho$ {bE ~Zm¶r J¶r h¡& BgH$m H¡${nQ>b ñQ´>³Ma {ZåZ{b{IV h¡…