SEMESTER SPRING 2024

Corporate Finance (FIN622)

ASSIGNMENT
Due Date: April 30, 2024, Total Marks: 10

Learning Outcome:
To help students understand Weighted Average Cost of Capital (WACC)
Assignment
The Weighted Average Cost of Capital (WACC) is crucial for businesses as it represents the
minimum return required by both debt and equity investors. It serves as a benchmark for
evaluating investment opportunities, guiding capital allocation decisions, and determining the
overall financial health of a company. By understanding WACC, businesses can optimize
their capital structure, minimize financing costs, and maximize shareholder value.
Assume you are a financial manager in a group having two listed companies, and
management has delegated to you the job of finding the WACC of both companies. The
management's goal is to determine which companies have low WACC. The capital structure
of both companies consists of debt and equity. Company A has debt to equity ratio of 40:60
and Company B has debt to equity ratio of 55:45 while the tax rate is 35% for both
companies. Both companies did not issue any preferred stocks for capital raising and other
details of the companies are as
Company A Company B
Common stock market value (Rs) 55 45
Recent paid dividend (Rs) 5.5 4
Expected constant growth (%) 8.5 7
Debt to equity ratio 40:60 55:45
Cost of debt (%) 16 15
Tax rate (%) 35 35

Requirement:

a) What would be the cost of equity of Company A and Company B (2+2)

b) What would be the WACC of Company A and Company B (2.5+2.5)
c) Which company has the potential for better growth if all other factors are the same,
and why (1)
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