Corporate Finance

CP India Ltd has the following capital structure, which it considers optimal:

Debt 25%

Preference Shares 15%

Equity shares 60%

Total 100%

Applicable tax rate for CPIL is 25%. and investors expect earnings and dividends to grow at a constant rate of 9% in the future. Risk free rate of return is 6%, average equity share has expected rate of return of 15%. CPILs beta is 1.50. Following terms would apply to new securities being issued as follows:

1. New preference can be issued at a face value of Rs. 100 per share, dividend and cost of issuance will be Rs. 8 per share and Rs. 4 per share respectively.

2. Debt will bear an interest rate of 10%. Calculate

a. Component cost of debt, preference shares, and equity shares assuming that CPIL does not issue any additional equity shares. (10 Marks) 350 Words

b. WACC. (10 Marks) 350 Words