ABC Limited has the following book value capital structure:

(10 Marks)

Equity Share Capital (150 million shares, 10 par)

1,500 million

Reserves and Surplus

.

2250 million

10.5% Preference Share Capital (1 million shares, . 100 par)

.

100 million

9.5% Debentures (1.5 million debentures, 1,000 par)

1,500 million

8.5% Term Loans from Financial Institutions

500 million

The Debentures of ABC Limited are redeemable after three years and are quoting at 981.05 per debenture. The applicable income tax rate for the company is 35%.

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The current market price per equity share is 60. The prevailing default - risk free interest rate on 10-year GOI Treasury bond 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 750 million for a new project. The firm plans to have a target debt to value ratio of 20%. The beta of new project is 1.4375. The debt capital will be raised through term loans. It will carry interest rate of 9.5% for the

first 100 million and 10% for the next 50 million.