7. PQR Ltd. Has the following book-value Capital Structure as on March 31, 2016. Sources of capital...
Question:
7. PQR Ltd. Has the following book-value Capital Structure as on March 31, 2016.
Sources of capital `
Equity share capital(1,00,000 shares) 20,00,000 12% Preference share 5,00,000 10% Debentures 15,00,000 40,00,000 The equity shares of the company are sold for `25. It is expected that the company will pay next year a dividend of `2 per equity share, which is expected to grow by 6% p.a.
forever. Assume a 30% corporate tax rate.
Required:
(i) Compute weighted average Cost of Capital (WACC) of the company based on the existing Capital Structure.
(ii) Compute the new WACC, if the company raises an additional `10 lakhs debt by issuing 12.5% debentures. This would result in increasing the expected equity dividend to `2.40 and level the growth rate unchanged, but the price of equity share will fall to `20 per share.
Step by Step Answer:
Financial Management
ISBN: 9789352605606
1st Edition
Authors: Swapan Sarkar, Bappaditya Biswas, Samyabrata Das, Ashish Kumar Sana