21 November 2009
The following is the capital structure of Saras Ltd. As on 31-12-2008. Equity shares – 20,000 shares of Rs.100 each Rs.20,00,000 10% Preference share of Rs.100 each Rs.8,00,000 12% Debentures Rs.12,00,000 Total Rs.40,00,000 The market price of the company’s share is Rs.110 and it is expected that a dividend of Rs.10 per share would be declared after one year. The dividend growth rate is 6%. (a) If the company is in the 50% tax bracket, compute the WACC. (b) Assuming that in order to finance an expansion plan, the company intends to borrow a fund in the form of a loan of Rs.20 lacs bearing 14% rate of interest, what will be the company’s revised WACC? This financing decision is expected to increase dividend from Rs.10 to Rs.12 per share. However the market price of equity share is expected to decline from Rs.110 to Rs.105 per share. Thanks in advance:)
CAclubindia
