Question
Weighted average Cost of capital for Lavi Ltd. is 12%.
Lavi Ltd. has issued equity worth Rs. 45 lakhs, 5% debt worth Rs. 15 lakhs and 6% preference shares worth Rs. 10 lakhs. The manager of this company wants to know the cost of equity applicable to the firm. The tax rate is 10%.Solution
WACC = Ke * We + Kp * Wp + Kd* (1-t) * Wd Let us calculate the Weight of each source of capital We = 45 / 70 = 0.64 Wd = 15 / 70 = 0.21 Wp = 10 / 70 = 0.15 Let us substitute the values in the equation 12% = Ke * 0.64 + 0.15 * 6% + 5% * (1-0.1) * 0.21 Ke = 15.8%
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