Answer to Question #176443 in Economics for Mayuri

Question

Crown Ltd has the following book value capital structure. Equity capital (shares of Rs

10 par value each) Rs 15 crore, 12% Preference capital (Rs 100 par value each) Rs 1

crore. Retained earnings Rs 20 crore, 11.5% Debentures (Rs 100 par value each) 10

crore and 11% Term loan Rs 12.5 crore. The next year expected dividend on equity is

Rs 3.6 per share and has an expected growth rate of 7%. The market value is Rs

40/share. Preference stock, redeemable after 10 years is currently trading at Rs 75 per

share. Debentures, trading at Rs 80 are redeemable after 6 years. Corporate tax rate is

40%. Calculate the WACC as per book value weights. Comment on the relevance of

calculation of WACC.

Answer 1

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