Course Name : Master of Business Administration

Semester Number : II Semester

Subject Code : KMBN204
FINANCIAL MANAGEMENT AND
Subject Name :
CORPORATE FINANCE
Faculty Name : DR. SOFIA KHAN
Designation : Assistant Professor
Institution : School of Management Sciences, Varanasi
Topic : Computation of Weighted Average Cost of Capital
 Numerical 4

The following is the capital structure of Saras

Ltd. as on 31-12-2020:
Equity Shares- 20,000 shares of 100 each = 20,00,000
10% Preference Shares of 100 each = 8,00,000
12% Debentures = 12,00,000
Total = 40,00,000

KMBN204: FINANCIAL MANAGEMENT AND CORPORATE FINANCE

 Numerical 4
The market price of the company's share is 110 and it is expected
that a dividend of ₹ 10 per share would be declared after 1 year.
The dividend growth rate is 6%.
(i) If the company is in the 50% tax bracket, compute the
weighted average cost of capital.
(ii) Assuming that in order to finance an expansion plan, the
company intends to borrow a fund of Rs 20 lacs bearing
14% rate of interest, what will be the company's revised
weighted average cost of capital? This financing decision is
expected to increase dividend from 10 to 12 per share.
However, the market price of equity share is expected to
decline from 110 to 105 per share.
KMBN204: FINANCIAL MANAGEMENT AND CORPORATE FINANCE
 Solution 4(a)
Ke = D1 +G
MP
Cost of Equity Capital (Before Raising Term Loans)-
Ke = 10 *100+ 6%
110
= 9.09 %+ 6%
= 15.09%

KMBN204: FINANCIAL MANAGEMENT AND CORPORATE FINANCE

 Solution 4(a)
Ke = D1 +G
MP
Cost of Equity Capital (After Raising Term Loans)-
Ke = 12 *100+ 6%
105
= 11.43 %+ 6%
= 17.43%

KMBN204: FINANCIAL MANAGEMENT AND CORPORATE FINANCE

 Weighted average cost of capital (Before Raising Term Loans)
Sources of Book Weights After Tax Weighted Cost %
Portion * Cost
Funds Value (%) Cost % (XW)%
(Lakh)
Equity 20 50 15 7.55
Shares
Preference 8 20 10 2.00
Shares
Debt 12 30 6 1.80
Total 40 100 11.35 %
(WACC)

KMBN204: FINANCIAL MANAGEMENT AND CORPORATE FINANCE

 Revised Weighted average cost of capital (After Raising Term Loans).
Sources of Book Weights After Tax Weighted Cost %
Portion * Cost
Funds Value (%) Cost % (XW)%
(Lakh)
Equity 20 33.33 17.43 5.81
Shares
Preference 8 13.33 10.00 1.33
Shares
Debt 12 20.00 06.00 1.20
Loan 20 33.34 07.00 2.33
Total 60 100 10.67 %
(WACC)

KMBN204: FINANCIAL MANAGEMENT AND CORPORATE FINANCE

KMBN204: FINANCIAL MANAGEMENT AND CORPORATE FINANCE