XYZ, a Telecom Company, has the following capital structure, which is considered

Question

XYZ, a Telecom Company, has the following capital structure, which is considered to be optimal: During this tax year, company is liable to pay tax @ 35%, and investors are expecting that earnings and dividends will grow at a constant rate of 10%. Current year's dividend is Rs. 4 per share and the common stocks are selling at Rs. 60 per share. XYZ can obtain new capital in the following ways: Preferred stock New preferred stock With a dividend of Rs. 15 can be sold to the public at a price of Rs. 97 per share. Debentures: Debentures can be sold at an interest rate of 13%. Determine the cost of each capital structure component and Calculate the weighted average cost of capital.

Explanation / Answer

1. Cost of prefered stock Kp=D1/P0 (Prefered) = 15/97% = 15.46% 2. Cost of common equity Ks=D1/P0 +g (Common Eq) =4/60%+10%=16.67% 3. Cost of Debt Kd=13% 4. WACC = WdKd(1-T) + WpKp + WsKs Putting values, we get WACC = 0.2*0.13*(1-0.35) + 0.20*0.1546 + 0.6*0.1667 = 0.1478 =14.78%

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