The liabilities side of the balance sheet

The following items have been extracted from the liabilities side of the balance sheet of XYZ Company as on 31st December 2005.

Paid up capital:

4 , 00,000 equity shares of Rs each                                                             40, 00,000

Loans:

16 % non-convertible debentures                                                                20, 00,000 12 % institutional loans                                                                                60, 00,000

Other information about the company as relevant is given below:

31st dec                                   Dividend                     Earning          average market price 2005                                        Per share                    per share                  per share

7.2                           10.50                           65

You are required to calculate the weighted average cost of capital, using book values as weights and earnings/price ratio as the basis of cost of equity. Assume 9.2% tax rate

Answer 4b:

	Computation of Weighted Average Cost of Capital (WACC):
	Nature of Capital		Value		Weights ( basis of bookvalues O/S.)	Cost of capital	Weights * Cost of Capital
	a) Equity Capital		4,000,000		33%	16.15 ( refer W.No. 1)	5.38
	b) 16% non-convertible debentures		2,000,000		17%	14.53 Interest (1-taxrate) = 16 % (100%-9.2% )	2.42
	c) 12% institutional loans		6,000,000		50%	10.90 Interest (1-taxrate) = 12 % (100%-9.2% )	5.45
	Total		12,000,000		100%		13.25
Working Note: 1
Cost of equity:
Price earnings approach =		Earnings per share / Market price per share 10.50  / 65  = 16.15 %