FIN622

Dear Students.... FIN622 Assignment Solution of Problem#1....
Cost of component: Common stock
Do = 1.75, g = 5% = 0.05, Po= Rs. 25
D1 = 1.75 (1 + 0.05) = 1.75 (1.05) = 1.84
Re = (1.84 / 25) + 0.05
= 0.073 + 0.05 = 0.12 or 12.00 %
WACC BV: Common Stock
Weightage of common stock (BV) x Re = 0.47 x 0.12 = 0.056
WACC MV : Common Stock
Weightage of common stock (MV) x Re= 0.52 x 0.12 = 0.06
Weightage of Preferred Stock (BV):
MV of preferred stock / Total Capitalization MV = 2,500,000 / 48,000,000= 0.05
Weightage of Bonds (BV):
BV of Bonds / Total capitalization BV = 12,000,000 / 42,500,000= 0.28
WACC BV: Bonds
(Bond weightage BV x Cost of bond) (1 – Tax rate) = (0.28 x 0.09) (1- 0.35)= (0.025) (0.65)= 0.016
WACC MV:
Bonds(Bond weightage MV x Cost of Bond) (1 – Tax rate) = (0.26 x 0.09) (1 - 0.35)= (0.023) (0.65)= 0.015
Weightage of Loans (MV):
MV of Loans / Total Capitalization MV = 8,000,000 / 48,000,000= 0.17
Overall WACC (BV):
WACC common stock + WACC preferred stock + WACC Bonds + WACC Loans= 0.056 + 0.72 + 0.016 + 1.36 = 2.15
Overall WACC (MV):
WACC common stock + WACC preferred stock + WACC Bonds + WACC Loans = 0.06 + 0.60 + 0.015 + 1.22 = 1.89