Answered: Calculate the WACC as per book value…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Crown Ltd has the following book value capital structure. Equity capital (shares of Rs
10 par value each) Rs 15 crore, 12% Preference capital (Rs 100 par value each) Rs 1
crore. Retained earnings Rs 20 crore, 11.5% Debentures (Rs 100 par value each) 10
crore and 11% Term loan Rs 12.5 crore. The next year expected dividend on equity is
Rs 3.6 per share and has an expected growth rate of 7%. The market value is Rs
40/share. Preference stock, redeemable after 10 years is currently trading at Rs 75 per
share. Debentures, trading at Rs 80 are redeemable after 6 years. Corporate tax rate is
40%. Calculate the WACC as per book value weights. Comment on the relevance of
calculation of WACC.

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