Cummins India Ltd has the following capital structure, which it considers optimal:
Preference Shares 10%
Equity shares 65%
Applicable tax rate for the company is 25%. Risk free rate of return is 6%, average equity
market investment has expected rate of return of 12%. The company’s beta is 1.10.
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. 10 per share and Rs. 2 per share respectively.
2. Debt will bear an interest rate of 9%.
a. component cost of debt, preference shares and equity shares assuming that the company
does not issue any additional equity shares.
a. Component cost of debt is:
Cost of preference shares is:
and cost of equity shares is: