In October $2013,$ Shweta Gujral, recently promoted to senior assistant to the Financial Controller of Locomotive Public Limited, assessed six investment projects for the next year. Her task was to analyze and present the findings to the Board of Directors at its annual meeting in $10$ days. The proposed project required an investment of Rs$.4\mathrm{.}8$ crore.

Founded in $1985,$ Locomotive Public Ltd$.$ became a leading graphite producer, gaining recognition for high$-$quality products, with a significant portion sold to Japan. Economic expansion in Japan in the $1990$s boosted graphite demand, leading to rapid sales growth. By $2013,$ the company expanded into lithium mining, electric vehicles, and energy production, achieving sales of Rs$.28$ crores with a net profit of Rs$.134$ lakhs.

In the early $2000$s$,$ the company formalized its capital budgeting using present value as the decision$-$making criterion, replacing average return on investment. Shweta's task was to update the cost of capital over the last $10$ years and determine the net present value of proposed investments. She proposed using the current cost of raising funds, weighted by their percentage mark$-$up$.$ The Financial Controller embraced this, and Shweta recalculated the cost of capital, providing a report for the Board of Directors.To determine the weighted average cost of capital, Shweta examined the costs associated with each funding source, focusing on the firm's intention to maintain its current financial structure, as indicated in Exhibit $1$ through conversations with the Financial Controller and other members of the Board of Directors.

Exhibit $1$: Locomotive Public Ltd$.$ Balance sheet for year ending March $31,2013.$

Assets Amount Liabilities Amount

Cash $180,00,000$ Accounts Payable $17,00,000$

Accounts receivables $6,20,00,000$ Short term debt $2,00,000$

Inventories $2,40,00,000$ Accrued taxes $23,00,000$

Total current Assets $10,40,00,000$ Total current liabilities $2,40,00,000$

Net fixed Assets $38,60,00,000$ Long term debt $14,40,00,000$

Goodwill $140,00,000$ Preference shares $9,60,00,000$

Total Assets $50,40,00,000$ Retained earnings $2,00,00,000$

Equity shares $2200,00,000$

Total liabilities & equity shareholder$$s fund $50,40,00,000$

She also ascertained that the robust growth patterns displayed by Locomotive Public Ltd$.$ over the past decade were anticipated to persist indefinitely due to the diminishing supply of US and Japanese domestic oil and the escalating importance of alternative energy resources. In her further investigations, Shweta discovered that Locomotive Public Ltd$.$ could issue additional equity shares, each with a par value of Rs$.25$ and currently trading at Rs$.45$ in the market. The expected dividend for the next period would be Rs$.4\mathrm{.}4$ per share, with an anticipated growth rate of $8$ percent per year for the foreseeable future. The flotation cost was projected to average Rs$.2$ per share.Shweta explored financing options for Locomotive Public Ltd$.\text{'}$s expansion. These included issuing preference shares at $11$ percent with a $5$ percent flotation cost and securing a $7-$year, $12$ percent loan from Punjab National Bank, with a $14$ percent cost for amounts beyond Rs$.40$ lakhs. The company historically used short$-$term debt for working capital, maintaining its proportion in the capital structure. Additionally, Rs$.120$ lakhs could be raised through a $10-$year bond issue at $11$ percent, and an extra Rs$.60$ lakhs through $10-$year bonds at face value with a $12$ percent coupon. Shweta acknowledged the need to incorporate the cost of retained earnings, uncertain of the specific cost, and discussed this with the Financial Controller. Locomotive Public Ltd$.$ is subject to a $40$ percent corporate tax rate. Shweta intended to present a report to the Board of Directors, outlining funding options, associated costs, and proposing a recalibrated cost of capital considering both external and internal sources and the corporate tax rate, for informed decision$-$making on the financing strategy for expansion and investment projects.