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Crown Ltd has the following book value capital structure. Equity capital (shares of Rs 10 par...

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 and market value weights.

Solutions

Expert Solution

WACC as per book value weights

Book value of Equity & Retained Earnings = Rs.15 crores+ Rs.20 crores =Rs.35 crores

Book Value of preference Shares = Rs. 1 crores

Book Value of Debentures =Rs. 10 crores

Book value of Term loan = Rs.12.5 crores

Cost of Equity = Next year Dividend/Share price + growth rate =3.6/40+0.07 = 0.1600 or 16.00%

Cost of Preference Shares = Dividend/ market price of Preference Share = Rs.100*12%/Rs.75 = 0.1600 or 16.00%

Pretax cost of Debentures(r) is given by (assuming annual coupon)

11.5/r*(1-1/(1+r)^6)+100/(1+r)^6 =80

Solving r =0.1708 or 17.08%

Using Book value weights

WACC = 35/(35+1+10+12.5)*16%+1/(35+1+10+12.5)*16%+10/(35+1+10+12.5)*17.08%*(1-0.4) +12.5/(35+1+10+12.5)*11%*(1-0.4)

=13.008% or 13.01%

WACC as per market value weights

Market value of Equity & Retained Earnings = No of shares* Market price per share + Rs.20 crores

=15 crores/10 *40 + Rs.20 crores = Rs.80 crores

Market Value of preference Shares = No of preference shares* Market price per preference share

=Rs1 crores /100 * 75 = Rs.0.75 crores

Market Value of Debentures =No of Debentures* Market price per Debenture

=Rs10 crores /100 * 80 = Rs.8 crores

Market value of Term loan = Rs.12.5 crores

Using Market value weights

WACC = 80/(80+0.75+8+12.5)*16%+0.75/(80+0.75+8+12.5)*16%+8/(80+0.75+8+12.5)*17.08%*(1-0.4)+12.5/(80+0.75+8+12.5)*11%*(1-0.4)

=14.3852% or 14.39%


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