Question#05 (7 Marks)

A company has following capital structure:

Long Term Loan Rs. 15 Millions

Preferred Stock Rs 13 Millions

Share Capital Rs 22 Millions

The company has expected growth rate of 9% per annum and tax rate of 40% will be applicable. The company has paid 2019s dividend 10 per share and its current stock price per share is 80. The risk free rate in the country is 8%, average stock has 14% rate of return. The beta of the stock is 1.5. The company has following details:

Preferred stock would be sold at a rate of 90 per share with the flotation cost of 8% per share. The company will pay fixed dividend of 10 per share.

Debt will be available at the rate of 9% per annum

Required:

1. Calculate cost of equity using CAPM formula.

2. Calculate cost of equity using Discounted cash-flow formula

3. Calculate cost of preferred stock.

4. Calculate the WACC of the company using cost of equity calculated by CAPM formula.

5. If the company issue new shares which will lead to increase its share capital by 5 Million. Calculate new WACC of the company using cost of equity calculated by CAPM formula.

6. If the company issue new shares which will lead to increase its debt by 5 Million. Calculate new WACC of the company using cost of equity calculated by CAPM formula.