8. XYZ Ltd. has the following book value Capital Structure:

Equity Share Capital (300 million shares, `10 par) `3,000 million Reserves and Surplus `4,500 million 11% Preference Share Capital (2 million shares, `100 par) `200 million 10% Debentures (3 million debentures, `1,000 par) `3,000 9% Term Loans from Financial Institutions `500 million The debentures of X Ltd. are redeemable after three years and are quoting at `982.5 per debenture. The applicable income tax rate for the company is 30%.

The current market price per equity share is `60. The prevailing default-risk free interest rate on 10 year GOI Treasury Bonds is 5.5%. the average market risk premium is 8%. The beta of the company is 1.1875.

The preferred stock of the company is redeemable after 5 years is currently selling at

`98.15 per preference share.

Required:

(i) Calculate weighted average Cost of Capital of the company using market value weights.

(ii) Define the marginal Cost of Capital schedule for the firm if it raises `1500 million for a new project. The firm plans to have a debt of 20% of the newly raised capital.

The beta of new project is 1.4375. The Debt Capital will be raised through term loans, it will carry interest rate of 10% for the first `200 million and 10.5% for the next `100 million.