In: Finance
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.
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%