A company has on its books the following amounts and specific costs of each type
ID: 2772288 • Letter: A
Question
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 (%)
Debt
4,00,000
3,80,000
5
Preference
1,00,00
1,10,00
6
Equity
6,00,00
9,00,000
15
Retained Earning
2,00,00
3,00,000
13
13,00,000
16,90,00
Determine the weighted average cost of capital using:
(a) Book value weights, and
(b) Market value weights.
Type of Capital
Book Value Rs.
Market Value Rs.
Specific Costs (%)
Debt
4,00,000
3,80,000
5
Preference
1,00,00
1,10,00
6
Equity
6,00,00
9,00,000
15
Retained Earning
2,00,00
3,00,000
13
13,00,000
16,90,00
Explanation / Answer
Solution.
Calculation of weighted average cost of capital using:
(a) Book value weights,
(b) Market value weights.
W.A.C.C based on book value = $142,000 / $1,300,000
= 10.92%
W.A.C.C based on Market value = $199,600 / $1,690,000
= 11.81%
Source of fund Amount B.V Amount M.V Cost % B.V x Cost M.V x Cost Debt $400,000 $380,000 5% $ 20,000 $ 19,000 Preference $100,000 $110,000 6% $ 6,000 $ 6,600 Equity $600,000 $900,000 15% $ 90,000 $ 135,000 Retained Earning $200,000 $300,000 13% $ 26,000 $ 39,000 Total $1,300,000 $1,690,000 $ 142,000 $ 199,600Related Questions
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