Calculate WACC with the following information. Which source of funding is most desirable and why? (10 Marks) PQR Ltd. is coming out with a new equity issue of Rs. 10 lacs par value Rs. 100/share. The cost of issuing external equity is around 5%. Shareholders expect a return of 16% p.a. for the risk involved in parking their funds in PQR Ltd.

PQR Ltd. also has retained earnings of Rs. 8 lacs as on date. It has a long term debt of Rs. 5 lacs taken at 8% p.a. Tax rate is @ 30% Preference shares capital of par value Rs. 6 lacs (Rs. 100 each), yield a return of 10% p.a. Market value of each equity share is Rs. 105 per share and that of Preference shares is Rs. 125/share.