A company is considering the possibility of raising Rs.

10,000,000 by issuing debt, prefe

The book values and the market values of the issues are as follows:

Ordinary shares
Reserves
Preference Shares
Debt

The following costs are expected to be associated with the above mentioned issues of

The firm can sell a 20 year Rs 1000 face value debenture with a 16 per cent rate of interest.
underwriting fee of 2 percent of the market price would be incurred to issue the debentures.

The 11 percent Rs 100 face value preference shares would fetch a price of Rs 120 per sha
However, the firm will have to pay Rs 7.25 per preference share as underwriting commission.

The firm’s ordinary shares are currently selling at Rs 150 per share.
The firm will pay a dividend of Rs 12 per share a the end of next year which is expected
The new ordinary shares can be sold at a price of Rs 145. The firm should also incur Rs 5 per
The beta of the firm is estimated to be 1.4 and the current market rate of return is 16%.
10 year Govt bonds currently yield 8% and 30 year govt bond yields are 8.7%.
Compute the weighted average cost of capital using (i) book value weights and (ii) market valu
preference capital, equity and retained earnings.

Market
Book Value
Value
300,000 600,000
100,000 -
200,000 240,000
400,000 360,000
10,00,000 12,00,000

ues of capital ( Assume a 35 percent tax rate ).

ected to grow at a rate of 7 percent.

5 per share floatation cost

et value weights.