Financial ManagementSubjectiveQuestion 13628 of 300
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**Practical Problem — Cost of Capital - Computation of WACC using Book Value and Market Value Weights (Marks: 6)** The capital structure of Galaxy Electronics Ltd. consists of: - Equity Share Capital (Face Value ₹10): ₹143,000,000 (Market price ₹25/share) - 10% Preference Share Capital (Face Value ₹100): ₹35,750,000 - 12% Debentures (Face Value ₹100): ₹71,500,000 The company's expected dividend next year (D1\displaystyle D_1) is ₹2.50 per equity share with an expected growth rate (g\displaystyle g) of 6%. Corporate tax rate is 30%. **You are required to compute:** (a) Cost of Equity (Ke\displaystyle K_e), Cost of Preference (Kp\displaystyle K_p), and Cost of Debt (Kd\displaystyle K_d). (b) Weighted Average Cost of Capital (WACC) using Book Value weights.

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Detailed Solution & Explanation

### Suggested Solution — Cost of Capital Computation #### 1. Specific Costs of Capital: - **Cost of Equity (Ke\displaystyle K_e)**: Ke=D1P0+g=₹2.50₹25.00+0.06=10%+6%=16.00%K_e = \displaystyle \frac{D_1}{P_0} + g = \frac{₹2.50}{₹25.00} + 0.06 = 10\% + 6\% = 16.00\% - **Cost of Preference Shares (Kp\displaystyle K_p)**: Kp=10.00%K_p = 10.00\% - **Cost of Debt (Kd\displaystyle K_d)**: Kd=I(1−t)=12%×(1−0.30)=8.40%K_d = I(1 - t) = 12\% ×\displaystyle \times (1 - 0.30) = 8.40\% #### 2. Statement of Weighted Average Cost of Capital (Book Value Weights):
Source of CapitalBook Value (₹)Weight (Wi\displaystyle W_i)Specific Cost (Ki\displaystyle K_i)Weighted Cost (Wi×Ki\displaystyle W_i ×\displaystyle \times K_i)
Equity Share Capital143,000,0000.571416.00%9.14%
10% Preference Capital35,750,0000.142910.00%1.43%
12% Debentures71,500,0000.28578.40%2.40%
**Total****250,250,000**1.0000**12.97%**
**WACC (Book Value Basis)** = **12.97%**.

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