Q4. How is the cost of capital relevant in capital budgeting decisions? Also discuss the factors affecting cost of capital. A company has the following capital structure : Particulars Book Value Market Value Equity Capital(30,000 3,00,000 4.80,000 shares of Rs. 10 each) Preference capital (600 60,000 70,000 shares of Rs. 100 each carrying 12% dividend) Reserves and Surplus 1,50,000 Debentures (2000 2,00,000 1,90,000 debentures of Rs. 100 each carrying 12% interest) 7,10,000 7,40,000 The expected dividend per share is Rs. 1.50 and the dividend per share is expected to grow at a rate of 8 per cent forever. Preference shares are redeemable after 5 years at par whereas debentures are redeemable after 6 years at par. The tax rate for the company is 50 per cent. You are required to compute the weighted average cost of capital (WACC) using market value weights