CP India Ltd has the following capital structure, which it considers optimal: Debt 25% Preference Shares 15% Equity shares 60% Total 100% Applicable tax rate for CPIL is 25%. and investors expect earnings and dividends to grow at a constant rate of 9% in the future. Risk free rate of return is 6%, average equityshare has expected rate of return of 15%. CPIL’s beta is 1.50. Following terms would apply to new securities being issued as follows: 1. New preference can be issued at a face value of Rs. 100 per share, dividend and cost of issuance will be Rs. 8 per share and Rs. 4 per share respectively. 2. Debt will bear an interest rate of 10%. Calculate a. Component cost of debt, preference shares and equity shares assuming that CPIL does not issue any additional equity shares. b. WACC.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
CP India Ltd has the following capital structure, which it considers optimal:
Debt 25%
Equity shares 60%
Total 100%
Applicable tax rate for CPIL is 25%. and investors expect earnings and dividends to grow at a constant rate of 9% in the future. Risk free
b. WACC.
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