QUESTIONS BAESD ON WACC

Q1) A companys after tax specific cost of capital are as follows:

Cost of debt 10%, Cost of preference shares-12%, cost of equity shares-15%. The following is the capital structure of the
company: Debt-Rs. 3,00,000; Preference shares- Rs. 2,00,000; ESC-Rs. 5,00,000. Calculate WACC using Book Values.

Q2 Calculate WACC from the following information:

ESC (40,000 shares fully paid up)- Rs. 4,00,000; 3,000 6% Debentures- Rs. 3,00,000; 2,000 6% Preference shares Rs.
2,00,000; Retained Earnings- Rs. 1,00,000. Earnings per equity share has been Rs.1 during the past years and equity share is
being sold in the market at par. Assume corporate tax @ 35% and shareholders tax liability at 30%. Calculate WACC using
Book Values.

Q3) From the following information calculate the WACC using book value and market values.
Source Book Value Market Value Specific COC
Debt 3,00,000 2,75,000 6%
Preference Shares 2,00,000 2,25,000 8%
Equity Shares 4,00,000 7,50,000 14%
Retained Earnings 1,00,000 ---- 13%

Q4) R Ltd. is considering the possibility of raising Rs. 25,00,000 by issuing equity shares, preference shares and debentures. The
book value and market value of the issue are as follows:
Source Book Value Market Value
Debt 10,00,000 9,00,000
Preference Shares 5,00,000 6,00,000
Equity Shares 10,00,000 15,00,000

The following costs are expected to be incurred on the above mentioned issue of capital. Corporate tax rate is 35%.
(i) The companys equity share is currently selling for Rs. 150. It is expected that the company will pay a dividend of Rs.12 per
share at the end of next year which is expected to grow at a rate of 7%. The company has to incur Rs.2 per share as flotation cost.
(ii) The 11% Rs. 100 face value preference share will be sold for Rs. 120. However, the company will have to pay Rs.4 per share
as underwriting commission.
(iii) The company can sell a 10 year Rs. 500 face value debentures with a 9% rate of interest. An underwriting fee of 2% on issue
price would be incurred on issue. Calculate WACC using Book Values.

Q5) The capital structure of Radhika Ltd. is as follows:

Equity Share Capital (4,000 shares fully paid up)- Rs. 4,00,000; 12% Debentures of Rs. 100 each Rs. 2,50,000; 9% Preferebce
Share Capital (2,500 shares fully paid up)- Rs. 2,50,000; Retained Earnings- Rs. 1,00,000. The company has earned Rs. 20 per
share on equity capital. The shares of the company are sold in the market at book value. The corporate tax rate is 35%. Cost of
equity capital is also to be assumed as the cost of retained earnings. calculate the WACC using book value and market values.

Q6) The following is the capital structure of ABC Ltd.

Sources Amount Specific COC

Equity Share Capital(2,00,000 shares of Rs10 each) 20,00,000 11%
Preference Share Capital (50,000 shares of Rs 10 each) 5,00,000 8%
Retained Earnings 10,00,000 11%
7.5% Debentures of Rs 1000 each 15,00,000 4.5%

Presently, the debentures are being traded at 94%, preference shares at par and the equity shares at Rs13 per share. Find out
WACC based on book value and market values.

Q7) Assume that the firm pays 30% tax, compute after tax cost of capital in the following cases:
(i) A 14.5% preference share sold at par.
(ii) A perpetual bond sold at par, coupon rate being 13.5%.
(iii) A ten year 8% Rs 1000 per bond sold at Rs 950.
(iv) A common share selling at a market price of Rs120 and paying a current dividend of Rs 9 per share which is
expected to grow at a rate of 8%.
(v) 14% Preference Share of Rs100 each, issued at 5% premium, redeemable at par after 6 years. Flotation cost is Rs8
and dividend distribution tax is 15%.
(vi) 12% Debentures of face value of Rs1000 each redeemable at par after 5 years, flotation cost being 5%.