Page 330 - Corporate Finance PDF Final new link

330 Corporate Finance BRILLIANT’S

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H$a gH$Vr h¡, g§emo{YV S>ãë¶yEgrgr H$s JUZm H$s{OE& H§$nZr H$s Anojm h¡ {H$ Z¶r ’$m¶Z|qgJ go g§~§{YV
ì¶mnma Omo{I‘ ~mOma ‘yë¶ ` 102 go ` 96 VH$ à{V eo¶a ZrMo bm gH$Vm h¡&

Solution:
Calculation of Cost of Equity

D 1 9
K =  g =  0.05 = 0.088 + 0.05 = 0.138 or 13.8%
e P 0 102
K = K (1 – t) = 0.10 (1 – 0.5) = 0.05 or 5%
d i
Calculation of WACC

Sources Amount Weight Cost% Weighted Cost
(`)

Equity Shares NPP 5/10 13.8 6.9
5,00,000
Preferences Shares 2,00,000 2/10 9 1.8
Debentures 3,00,000 3/10 5 1.5
10,00,000 10.2
The WACC is 10.2%.
If the company decides to raise ` 5,00,000 by the issue of 12% loan and market price of the
share is expected to go down to ` 96, then the WACC may be calculated as follow:
Calculation of Cost of Equity

D 1 9
K =  g =  0.05 = 0.094 + 0.05 = 0.144 or 14.4%
e P 0 96
K for Loan = 0.12 (1 – 0.5) = 0.06 or 6%
d
Calculation of Revised WACC

Sources Amount Weight Cost% Weighted Cost
(`)

Equity Shares 5,00,000 5/15 14.4 4.8
Preferences Shares 2,00,000 2/15 9 1.2
Debentures 3,00,000 3/15 5 1.0
Loan 5,00,000 5/15 6 2.0
15,00,000 9%

The new WACC of the company will be 9%.