ABC Ltd. is a textile company and has the following capital structure:

6,000 Equity shares of Rs. 10 each Rs. 60,00,000

6% preference shares of Rs. 100 each

2,00,000 8% Debentures 10,00,000.

The current market price of the share is Rs. 70. The company is expected to declare a dividend on equity of Rs.10 at the end of the current year, with an expected growth rate of 10%. The market price of preference shares is Rs. 200. The applicable tax rate is 50%.

The industry average of WACC is 8%

You are required to:

• Find out the cost of equity capital and the WACC.(10 marks)
• Compare the WACC of ABC ltd with its industry average and comment on its position. In case the WACC of ABC ltd is worse than the industry average suggest some measures to improve the same. (10 marks)