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BRILLIANT’S Cost of Capital 333

The expected dividend per share is ` 1.40. The dividend per share is expected to grow at a rate
of 8% forever. Preference shares are redeemable after 5 years, whereas the debentures are
redeemable after 6 years. The tax rate of the company is 50%. Calculate the WACC for the existing
capital structure using market value proportions as weights.
à{V eo¶a Ano{jV {S>{dS>|S `1.40 h¡& {S>{dS>|S> à{V eo¶a h‘oem 8% H$s Xa go ~‹T>Zo H$s Anojm h¡& {à’$a|g eo¶g©
5 df© níMmV² arS>r‘o~b h¢& O~{H$ {S>~|Mg© 6 df© níMmV² arS>r‘o~b h¢& H§$nZr H$m Q>¡³g aoQ> 50% h¡& doQ²>g Ho$ ê$n ‘|
‘mH}$Q> d¡ë¶y ànmoe©Ýg H$m Cn¶moJ H$aHo$ {dÚ‘mZ H¡${nQ>b ñQ´>³Ma Ho$ {bE WACC H$s JUZm H$a|&
Solution:
Suppose, market price of equity is same as its face value, i.e. ` 10 per share.

Dividend 1.40
 K =  Growth Rate =  0.08 = 0.22 or 22%
e Market Price 10
K = 13%
p
K = k (1 – t) = 14 (1 – 0.50) = 7%
d i
Proportion of equity capital and retained earnings is 5 : 3 in book value.
 It should also maintain in market value.

5
 Equity capital=  4,50,00,000 = ` 2,81,25,000
8
3
Reserve and surplus =  4,50,00,000  ` 1,68,75,000
8
and cost of equity and reserve and surplus also remain same i.e. 22%.
Calculation of Weighted Average Cost of Capital
Sources Amount cost After tax Weights Weighted cost
(`)

Equity share capital 2,81,25,000 0.22 0.44 0.097
13% preference capital 45,00,000 0.13 0.07 0.009
Reserve and surplus 1,68,75,000 0.22 0.26 0.057
14% debentures 1,45,00,000 0.07 0.23 0.016
6,40,00,000 0.179

So, Weighted Average Cost of Capital (K ) 17.9 or 18%.
0
Illustration 4.1.28
Your company’s share is quoted in the market at ` 20 currently. The company expects to pay
a dividend of ` 1 per share and the investor’s market expects a growth rate of 5% per year
(a) Compute the company’s equity cost of capital;
(b) If the anticipated growth rate is 6% p.a., calculate the indicated market price per share;