A public limited company has the following capital structure, which it considers to be optimal: Debt = 25% , preferred s...

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A public limited company has the following

April 14, 2018

A public limited company has the following capital structure, which it considers to be optimal: Debt = 25% , preferred stock = 15% and common stock = 60%.

The company’s tax rate is 40% and investors expect earnings and dividends to grow at a constant rate of 6% in the future. The company paid a dividend of Rs.3.60 per share last year (D0 ), and its stock currently sells at a price of Rs.60 per share.

The risk free rate of return in the market is 6%, the market risk premium is 5%, and the company has beta equal to 1.3.

All these terms would apply to new security offerings:

Preferred stock: New preferred stock could be sold to the public at a price of Rs.100 per share, with a dividend of Rs.9. Ignore flotation costs.

Debt: Debt could be obtained at an interest rate of 9%.

Required:

Calculate Weighted Average Cost of Capital (WACC) for the company.










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