Answer to Question #144060 in Financial Math for Ka

Question

CP India Ltd has the following capital structure, which it considers optimal: Debt 25%
Preference Shares 15% Equity shares 60% Total 100%
Applicable tax rate for CPIL is 25%. and investors expect earnings and dividends to grow at a constant rate of 9% in the future. Risk free rate of return is 6%, average equity share has expected rate of return of 15%. CPIL’s beta is 1.50. Following terms would apply to new securities being issued as follows:

1. New preference can be issued at a face value of Rs. 100 per share, dividend and cost of
issuance will be Rs. 8 per share and Rs. 4 per share respectively.
2. Debt will bear an interest rate of 10%.
Calculate
a. Component cost of debt, preference shares and equity shares assuming that CPIL does
not issue any additional equity shares.
b. WACC.

Answer 1

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