calculate the weighted average cost of capital
he weighted average cost of capital is the overall capital of the company based on the weights. The main objective of the company is to reduce the cost of capital to a certain level where the shareholders could maximize the value. Higher the value of shareholders more profitability will be there. The amount is raised through internal sources or the external sources and will select the source that decreases the value.
cost of debt capital=2Face value+Issue priceFace value (1−tax value)+maturity periodFace value−issue price
=2$1000+$955$1000×8.5%(1−3.5%)+15$1000−$955
=$977.5$55.25+$3
=5.95%
Cost of preference capital=MarketpriceDividend×100
=$150$15×100
=10%
Cost EquityCapital(DDM method)
market Dividend for next year+growth rate.
$165−$40×4%$18+6%
=$163.4−$40×4%$18+6%
=17.02%
Cost retained earnings
=market priceDividend year+Growth rate
=$165$18+6%
=16.91%
Calculation of weighted average cost of capital;
=cost of equity×weights+cost of Retained earnings×weights
=17.02%×13550+10%×13525+5.95%×13530+16.91%×13530
=6.3037%+1.8519%+1.3222%+3.7578%
=13.2356%
Comments