Here is the condensed 2019 balance sheet for Info-Tech Company (in thousands of Rupees):

2019

Current assets 70,000.00

Net fixed assets 105,000.00

Total assets 175,000.00

Accounts payable and accruals 31,500.00

Short-term debt 3,500.00

Long-term debt38,500.00

Preferred stock (10,000 shares) 8,750.00

Common stock (50,000 shares)45,500.00

Retained earnings 47,250.00

Total common equity 92,750.00

Total liabilities and equity 175,000.00

Info-Tech's earnings per share last year were PKR112. The common stock sells for PKR1,925, last year's dividend (D₀) was, PKR 73.5 and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Info-Tech's preferred stock pays a dividend of PKR 115.50 per share, and its preferred stock sells for PKR 1,050.00 per share. The firm's before-tax cost of debt is 10%, and its marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Info-Tech's beta is 1.516. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals PKR 42 million.

a)Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.

b)Now calculate the cost of common equity from retained earnings, using the CAPM method.

c)What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r_e and r_s as determined by the DCF method, and add that differential to the

CAPM value for r_s.)

d)If Info-Tech continues to use the same capital structure, what is the firm's WACC assuming that

i.it uses only retained earnings for equity, and

ii.if it expands so rapidly that it must issue new common stock.

e) Explain terms and formula to compute them, DCF, CAPM and WACC. [