O The following is the capital structure of ABC Ltd.

Source Book value

Equity share capital (2 lacs shares of Rs. 10 each) 2,000,000
Preference share capital (50,000 shares of Rs. 10 each) 500,000
Retained earnings 1,000,000
9% Debentures of Rs. 1000 each 1,500,000

5,000,000

O Presently, debentures are being traded at 94%, preference shares at par, and equity shares at Rs
O Find out WACC based on Book value and market value weights.

Solution WACC = ke.w1 + kd.w2 + kp.w3 + kr.w4

ON Book value weights

WACC 8.75%

On market value weights

WACC 8.64%
 Specific Cost of capital Weights Market value Cost of capital Weights
11% 0.4 2600000 11% 0.576496674
8% 0.1 500,000 8% 0.110864745
11% 0.2
4.50% 0.3 1410000 4.5% 0.312638581
4510000

r, and equity shares at Rs.13 per share.

no of debt. 1500
 Proportions
11th slide Equity 70% Ke 16%
12% debt 30%
Tax rate 30%

Kd 0.084

Ke 0.16

Therefore WACC 0.1372

O The capital structure of Adam Ltd. in B.V terms is as follows:
Particulars Amount
(20 million shares, Rs. 10 each) Rs. 200 million
12% Preference capital (5 lac shares, Rs. 100 each) Rs. 50 million
Retained earnings Rs. 350 million
14% debentures (12 lac debentures, Rs. 100 each) Rs. 120 million
13% Term loans Rs. 80 million
O The next expected dividend per share is Rs. 2.00. The dividend per share is expected to grow
O Preference stock, redeemable after 10 years, is currently selling for Rs. 85/share.
O Debentures, redeemable after 5 years are selling for Rs. 90/debenture.
O Tax rate is 30%.
O Calculate WACC based on market values.

Calculating the market values

Source
Equity shares
Preference shares
14% debentures
13% term loan

Working notes

1. Preference dividend 12
Therefore cost of preference 0.14594595
Pref dividend = 12% * 100 (cost of share)

2. Debentures
Tax 30%
Fv 100
MV 90
n 5
interest 14%

I(1-t) 0.098
(MV+FV)/2 95
(FV-MV)/n 2

3. Term loan
interest 13%
cost 0.091
s. 200 million
s. 50 million
s. 350 million
s. 120 million
s. 80 million
per share is expected to grow @ 12%. The market price per share is Rs. 50.00.
g for Rs. 85/share.

Amount Cost Weights We*cost

1000 16.00% 0.81 13.0%
42.5 14.59% 0.03 0.5%
108 0.09 0.0%
80 9.10% 0.07 0.6%

1230.5 1

14.59%

0.02208 2.208421
9.10%