Wp = Percentage of preference share to total capital W = Percentage of equity to total capital W. = Percentage of retained earnings Weighted average cost of capital is calculated in the following formula also: K W W Where, Kw = Weighted average cost of capital X = Cost of specific sources of finance W = Weight, proportion of specific sources of finance. Exercise 11 A firm has the following capital structure and after-tax costs for the different sources of funds used: Source of Funds After-tax cost Amount Rs. Proportion % 20 4 25 8 Debt Preference Shares Equity Shares Retained Earnings Total 12,000 15,000 18,000 15,000 30 12 25 11 60,000 100 You are required to compute the weighted average cost of capital. Exercise 12 A company has on its books the following amounts and specific costs of each type of capital. Type of Capital Book Value Rs. Market Value Rs. Specific Costs (%) t6 Debt 5 | Preference Equity Retained Earnings 4,00.000 1.00.000 6,00,000 2,00.000 3,80,000 1,10,000 9,00,000 3.00.000 8 15 13 13,00,000 16,90,000 Determine the weighted average cost of capital using: (a) Book value weights, and (b) Market value weights. How are they different? Can you think of a situation where the weighted average cost of capital would be the same using either of the weights? (MBA - P.U. Nov. 2005)