Case study - WACC (with Additional Finance)

The following is the capital structure of Simons Company Ltd. as on 31.12.20X5:

The market price of the company’s share is share would be declared for the year 20X6. The dividend growth rate is 6%:

(i) If the company is in the 50% tax bracket, compute the weighted average cost of capital.

(ii) Assuming that in order to finance an expansion plan, the company intends to borrow a fund of Rs.10 lakhs bearing 14% rate of interest, what will be the company’s revised weighted average cost of capital ? This financing decision is expected to increase dividend from Rs 10 to Rs 12 per share. However, the market price of equity share is expected to decline from  Rs 110 to Rs 105 per share.

For Solution

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