WACC(Including Marginal cost of capital) Case - 6 (Talking Head)

access_time 2020-03-07T06:17:39.85Z face CA N Raja Case Study Solved

XYZ Ltd. has the following capital structure which is considered to be optimum as on 31st March, 2013

The company’s share has a market price of Rs23.60. Next year dividend per share is 50% of year 2013 EPS. The following is the trend of EPS for the preceding 10 years which s expected to continue in future.

The company issued new debentures carrying 16% rate of interest and the current market price of debenture is Rs 96.

Preference share of Rs 9.20 (with annual dividend of Rs 1.1 per share) were also issued. The company is in 50% tax bracket.

(I) Calculate after tax:

    (a) Cost of new debt

    (b) Cost of new preference shares

    (c) New equity share (consuming new equity from retained earnings)

(II) Calculate marginal cost of capital when no new shares are issued.

(III) How much can be spent for capital investment before new ordinary shares must be sold. Assuming that retained earnings for next year’s investment are 50 percent of 2013.

(IV) What will the marginal cost of capital when the fund exceeds the amount calculated in (III), assuming new equity is issued at Rs20 per share?

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